Reserve Bank to deliver Christmas cheer

Homeowners are set for an early Christmas present today courtesy of the Reserve Bank (RBA), which is set to deliver an interest rate cut of at least 0.75 percent.

A 75 basis point cut would shave $164 off the monthly repayment on a $350,000 mortgage and would take the cash interest rate to 4.5 percent, its lowest since May 2002.

Watch the decision live from 2:25pm

The RBA's board, which decides on the level of interest rates, is currently meeting in Melbourne and an announcement will be made at 2:30 pm AEDT today. While most economists are expecting a 75 basis point cut, a bigger reduction is not out of the question, with markets predicting a move as big as 125 basis points.

Economic data released yesterday showed that inflation could be set to fall to 3 percent over the coming 12 months while other economic indicators point to slowing economic growth strengthening the case for a big cut.

Today's RBA meeting is its last until February, adding to the case for a potentially larger cut to official rates, with some economists calling for a reduction of 1 percent or even 1.25 percent today. A cut of 1 percent would take the cash rate to 4.25 percent and mean that a homeowner with a $350,000 mortgage will be paying $710 per month less in repayments since the current cycle of cuts began in September of this year.

However, Bill Evans, managing director economics and research at Westpac believes the argument that the Reserve Bank needs to factor in two months due to the missing January meeting is a red herring.

"The moves anticipated by the market are way too ambitious," he said. "The argument that the December move has to cover two months, because there is no scheduled meeting in January, is naive. As we have seen on numerous occasions with the [US Federal Reserve] Fed a board meeting can be convened with a phone hook up if extraordinary circumstances warrant. Rates were cut in both January 1990 and January 1992."

Economists at ANZ, meanwhile, believe that an emergency Reserve Bank meeting in January would send a message of panic and for that reason a bigget cut today cannot be ruled out.

The Reserve Bank will be hoping today's cut, along with one off payments to pensioners and low-income families, will stimulate spending and economic activity through the Christmas period.