Reserve Bank cuts interest rates to historic low of 1.25pc

The Governor of the Reserve Bank of Australia, Dr Philip Lowe has appeared to foreshadow an interest rate cut

Despite the likelihood Australians can expect their lowest rate in history to tumble further, Dr Lowe says it isn't in reaction to a "deterioration in our economic outlook".

"Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy".

In the Q&A session, Lowe said that if unemployment can be pushed down to around 4.5%, then he's confident that inflation will rise back to within the central bank's target range.

Some pick-up in growth in household disposable income is expected, and this should support consumption.

Banks have benefited from a substantial reduction in the cost of raising funds on wholesale markets, Mr Lowe said.

The treasurer has also reminded the banks of the recent findings of the banking royal commission to underline his argument.

Prior to Tuesday, just half the 12 RBA cuts since November 2011 were passed on in full - or within 0.01 percentage points of full - by the major banks.

The banks are continuing to look for ways to recover lost profit margins, which were eroded by previously high funding costs.

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Shadow treasurer Jim Chalmers said the "wages crisis" was a key reason for the cut.

The ANZ was the first of the big four banks to cut rates, nine minutes after today's RBA decision. "They've got no excuse for not doing that", he told ABC Radio Melbourne.

"We strongly believe reducing rates is the right thing to do by our customers and reflects our focus on earning trust in the community and rewarding our loyal existing customers", Mr Baird said".

"They know this is a government that generally goes pretty soft on the banks", he said. That marked the first time a Fed official has publicly suggested the need for a cut since the US held rates in January.

Canstar reports there were 531 interest rate moves in May, with 85% (449) of these being cuts to fixed rates.

"One of the biggest contributors to the continued market downturn in WA has been the excessively tight lending criteria that banks are insisting that home loan applications meet", chief executive Tanya Steinbeck said.

Lower mortgage rates, together with the likelihood of lower borrower serviceability assessments if APRA delivers on a relaxation to the base serviceability rate later this month, as well as renewed confidence following the federal election, are likely to see an improvement in housing market activity.

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