After months of speculation, the Reserve Bank of Australia has bowed to the pressures of an ailing economy and cut official interest rates to two per cent, the first cut since February.

The decision was widely predicted by both economists and traders, with the ASX rate indicator index putting the likelihood of a rate cut at 76 per cent on Monday.

This is now the lowest the cash rate has ever been, and brings the Australian central bank’s monetary policy ever closer to that of its GFC-afflicted European and American counterparts, where ultra-low rates reign.

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In his statement, RBA governor Glenn Stevens said the key factor influencing the decision was low business investment.

“Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year. Public spending is also scheduled to be subdued.

“The economy is therefore likely to be operating with a degree of spare capacity for some time yet. Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.”

He said that this month’s rate cut would take advantage of encouraging trends in household spending.

The dollar reacted to the rate cut erratically. Within a minute of the announcement, it plunged from 0.7853 to 0.7835 US cents. It then leapt to more than 90 cents, before stabilising around the 0.789 cent mark.

The ASX 200, meanwhile, leapt 50 points, but quickly plunged back another 65 points to around the 5820 mark.

Treasurer Joe Hockey said the the rate cut should send a positive message to businesses and consumers.

“Now is the time to borrow and invest. Whether you be a household or a small business, now is the time to have a go,” he said.

Shadow Treasurer Chris Bowen, however, said the rate of two per cent was an “emergency low”. He said the Treasurer is “failing at his job and the Reserve Bank is stepping in”.

Property market

One factor that was putting the RBA off cutting rates was the fear that cheaper borrowing rates would increase property speculation in a market that is already red hot.

In his statement Mr Stevens downplayed these fears, saying: “Growth in lending to the housing market has been steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities.

“The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.”

John Caelli, general manager of markets at ME Bank, said there is “always some danger that when credit is cheaper you get speculative activity”.

“But I think they’re going down the right path with APRA and some of the other regulators in making sure that investment lending doesn’t get out of control.”

He made the point that the RBA must set monetary policy for the entire nation, not just Sydney (where the property market is most in danger of overheating).

Bank deposits and home loans

Meanwhile, in good news for bank depositors, Mr Caelli said he didn’t think deposit rates were going to fall “too much further”.

“I think the market had already fully priced in this rate cut, and potentially one more.”

While short term interest rates will move with the cash rate, he said longer term rates such as term deposits are likely to stay the same.

Mr Caelli said there was unlikely to be another rate cut for “some period of time”.

“Will it be the last rate cut this year? It’s hard to say. But I think we’ll certainly have a breather for some time,” he said.

On home loans rates, Mr Caelli said ME Bank had not reached a decision on whether to pass on the saving to borrowers, but said it was “under consideration”.

ANZ has already announced it will cut variable home loan rates by 0.25 percentage points, effective on Friday.