Banking & Saving - RBA cuts official interest rates by 100 basis points

The Reserve Bank of Australia (RBA) has cut interest rates by a full percentage point to 6 percent in an effort to prevent the Australian economy from falling victim to further trouble from the global financial crisis.

St George chief economist Besa Deda believes The central bank may make further cuts by the end of the year.

"It's taken the market by surprise but it's a wise move given the deteriorating credit market that was occurring," she said.

"They're just trying to get a firm handle on this and protect the economy.

"I wouldn't rule out another 25 basis point easing, but it's more data dependent, depending on how the credit crisis works out."

It was the first one percent cut in over 16 years and came as a surprise to financial markets, which had expected a half percent basis point cut.

RBA's governor Glenn Stevens said in a statement on Tuesday that a more substantial cut than normal was required to pull down borrowing costs and help Australia to survive in the global economy. This effectively makes credit cards and home-loans cheaper to borrow as you will pay less interest than before.

"The board also took careful note of movements in funding costs in wholesale markets. Having weighed these considerations, the board decided that, on this occasion, an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers.

"The board does not, however, regard that movement as establishing a pattern for future decisions."he said.

The major commercial banks co-ordinated their quarter percent rate cut with the RBA in September, the first cut in seven years.

But the the commercial banks will not necessarily match the RBA's cut this time.

This is not only happening in Australia. Other world-wide central banks, including the US and the UK, have also made co-ordinated rate cuts.

The Australian dollar dropped by 1.6 US cents to 70.36 US cents shortly after the Reserves announcement, but has now risen back above 72 US cents.

RBC Capital Markets senior economist Su-Lin Ong said she was in a "little shock" after seeing the size of the RBA rate cut.

"I was not looking at a 100 point cut this afternoon. The RBA has decided to move very aggressively. It is driven really by the sharp deterioration in the financial and credit markets over the last month, and the implication for global growth."she said.

ANZ Banking Group Ltd chief economist Saul Eslake welcomed the massive rate cut by the RBA.

"I would describe today's move as extraordinary and bold. They are clearly very concerned about the financial crisis and its potential impact on global growth, on Asian economies which they specifically mention, and on commodity prices.

"They've reduced their concern about the outlook for inflation and they are obviously much more concerned than they were a month ago about the downside risks to the Australian economy."