Interest Rates Slashed by 0.5%

The Reserve Bank has handed borrowers and the struggling non-mining sector some financial relief, slicing interest rates by 50 basis points in a surprise move.

At its May meeting the board of the central bank cut the cash rate to 3.75 per cent, its lowest level since December 2009.

Federal Treasurer Wayne Swan welcomed the decision as "the interest rate cut that households and small businesses have been hanging out for".

In a statement, Reserve Bank governor Glenn Stevens said the "accretion of evidence" in recent months suggested it was now appropriate to cut rates, with economic conditions somewhat weaker than the central bank had expected and inflation falling.

Mr Stevens hinted that the size of the cut was necessary to ensure that commercial banks eased their rates to below the levels of December last year.

"In considering the appropriate size of adjustment to the cash rate at today's meeting, the board judged it desirable that financial conditions now be easier than those which had prevailed in December," Mr Stevens said.

"A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates."

It was the first time in more than three years the central bank had eased rates by more than 25 basis points.

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