1:50p.m. 2nd December 2008

The Reserve Bank of Australia has slashed the official cash rate by 100 basis points to 4.25 per cent following today’s monthly board meeting.

RBA governor Glenn Stevens said that while the Australian economy had been more resilient to the global economic downturn than other advanced economies, recent data indicated a significant moderation in demand and activity had occurred.

“With confidence affected by the financial turbulence and a decline in the terms of trade now under way, more cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term,” Mr Stevens said in a statement.

He expects inflation will soon start to fall.

“Weighing up the international and domestic developments of recent months, the board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting,” he said.

“Given trends in money market yields, most lending rates should fall significantly.”

He said that together with the spending measures announced by the government, and a large fall in the Australian dollar, significant policy stimuli would be supporting demand over the year ahead.

Treasurer Wayne Swan urged banks to pass on the cuts minutes after the central bank announced its decision.

“This is a vital rate cut ... delivered at a time when all our joint efforts are directed towards strengthening the economy and protecting Australian jobs,” he said.

“For these reasons the government does expect the banks to pass this on in full.”

Rate cuts since September had reduced monthly repayments by about $600 a month on a $300,000 mortgage, Mr Swan said.

He said the government’s fiscal policy and the Reserve Bank’s monetary policy were working in tandem to strengthen the economy.

“What this means is that all arms of policy are directed at buttressing this country from the worst the world can throw at us.”

People making repayments on a $300,000 home loan will save about $193 a month while people making repayments on a $450,000 mortgage will save almost $290 a month.