1pc cut in official interest rates shocks markets

Reserve Bank surprisingly slashes interest rates by 1 percentage point, as economic uncertainty helps borrowers

The Reserve Bank of Australia has slashed the official cash rate by 1 percentage point to 6 percent, as economic uncertainty delivers an upside for borrowers.

The Reserve was tipped to cut the cash rate by just 0.5 percentage points.

The last time the RBA cut interest rates by 100 basis points was in May 1992. That decision was one of five cuts of 1 percent in succession, reducing the rate from 11.5 percent to 6 percent in just over 12 months.

Reserve Bank Governor Glenn Stevens says international financial markets have taken a "significant turn for the worse in September".

He warns that inflation will probably rise to 5 percent in the September quarter, but adds the RBA still expects inflation to decline in 2009.

"The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected," he says.

"Should that occur, inflation would most likely fall faster than earlier forecast.

"Given that background, the Board judged that a material change to the balance of risks surrounding the outlook had occurred, requiring a significantly less restrictive stance of monetary policy."

Stevens says these reasons, alongside the funding costs in wholesale markets were the reasons behind the "unusually large movement in the cash rate".

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

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