Australia's big four banks have moved quickly to cut variable home loan interest rates after the central bank announced it would lower official rates on Tuesday.
The banks made their decision amid earlier calls by the federal government that they pass on any rates change by the Reserve Bank of Australia to borrowers.
The RBA said it would lower the Official Cash Rate to 7%, from 7.25%, which will take effect on Wednesday.
The cut is the first since December 2001 and signals the start of an easing cycle, after the bank increased interest rates 12 times between May 2002 to March 2008.
The RBA reaffirmed its view that its tight monetary policy, combined with the global credit crisis, has slowed demand (spending) enough to bring inflation down over the next few years.
"The evidence is that the tight financial conditions, in conjunction with other factors including higher fuel costs and lower asset values, have exerted the needed restraint on demand," the RBA said in a statement from its governor, Glenn Stevens.
This was not significantly different from the assessment in the quarterly monetary policy statement released last month or the minutes of the previous monetary policy meeting in early August.
The usual warnings apply. The RBA warned the rise in the terms of trade is working in the opposite direction, adding to income and spending power. These opposing forces meant "considerable uncertainty has surrounded the outlook for demand and inflation."
But the RBA obviously believes things are still heading in the right direction. "On balance, however, it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead," it said.
The main stumbling block between the RBA and more rate cuts now appears to be wages.
Banks cut interest rates
ANZ Banking Group was to first to act, immediately announcing it was cutting its standard rate by 25 basis points to 9.37% for new and existing customers from 8 September.
The bigger mortgage lender, Commonwealth Bank of Australia, said it will also cut its variable home loan rates by 25 basis points.
Its complete home loan variable rate will fall to 9.33%, from 9.58%. Its economiser base variable rate will fall to 8.82%, from 9.07%. The new rates will be effective from 8 September for new and existing customers.
But Westpac Banking Corporation customers will be the first to fell the effect of lower rates, after the bank lowers its standard variable rate from Thursday. Its standard variable home loan rate will drop by 25 basis points to 9.36%.
National Australia Bank also cut its rates. Its standard variable home loan rate will top 9.36% from Friday.