Retailers will be left smiling after the Reserve Bank reduced the cash rate by 50 basis points to 3.75 per cent – the biggest cut made since February 2009.

Glenn Stevens, RBA governor, said the decision was necessary following somewhat weaker than expected economic conditions, while inflation has moderated

“In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate,” he said.

“Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.

“Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over 2 per cent over the latest four quarters.

“CPI inflation has also declined, from about 3.5 per cent to a little over 1.5 per cent at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3 per cent range.”

The widely predicated rate cut by economists may possibly mean much needed relief retailers have been after in this struggling climate. However, the question remains with whether the banks will pass on the rate cut.

Australian Retail Association president Roger Gillespie said the RBA delivered the rate cut the retail industry needed and it’s now up to the big banks to follow

“Over the past couple of months, retailers have paid for the big banks’ greed after they raised interest rates despite the RBA’s hold on the cash rate in March and April. However, retailers are today calling on the banks to follow the RBA’s lead and immediately pass on the rate cut in full.

“Retailers are operating in the lower gear of the economy and if the rate cut is passed on in full by the banks, this will go some way to relieve the pressure on a sector operating amid low consumer confidence, a higher Australian dollar and increased global competition.

“With more pressure from the Carbon Tax and wage increases expected to hit retail confidence in July, the ARA is calling on the RBA to consider at least two more rate cuts over the next couple of months to give retailers the confidence boost they’ll need over this time.

“We’re hopeful the big banks will do the right thing and pass on the rate cut in full to Australian families trying to make ends meet,” Gillespie said.