The Reserve Bank of Australia's (RBA) first interest rate cut in two and a half years has proved timely, after the eurozone took another turn for the worse on fears Greece could overturn its own debt rescue package.
The local central bank cut the cash rate by 25 basis points on Tuesday following its monthly board meeting, citing an improved inflation outlook.
But within hours of the move, global markets were struck by the implications of the call by Greece's Prime Minister George Papandreou for a referendum on the bail-out package agreed by European leaders less than a week ago.
Australian shares dropped more than 1.5 per cent in early trading, following on from a near-three per cent tumble among some US exchanges and a slump of as much as seven per cent on European bourses.
"This is a very negative development for the eurozone and could push Europe into recession, unless the situation is resolved quickly," National Australia Bank (NAB) Capital chief economist Rob Henderson said in a briefing note.
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"This would have a negative impact on Asia and hence Australia's prospects as well."
Mr Henderson said NAB had a tentative forecast for a further interest rate cut by the RBA in February next year, with only an "an out-of-field" chance of a move in December.
"Maybe we are just seeing it in Greece," he said.
Opposition treasury spokesman Joe Hockey said events in Greece were concerning.
"It seems as though the government is holding a referendum simply to shore up its community approval rather than getting the best economic outcome for Greece," Mr Hockey told ABC television.
"It would prove a tipping point in Europe, and whilst the rest of Europe with all the goodwill in the world can try and manage the Greek debt, if the Greeks don't want to manage their own debt then that raises very serious concerns."
Finance Minister Penny Wong commended the Australian banks that had already passed on the RBA's 25 basis point cut in full, saying there was "no excuse" for the others not to follow suit.
Among the big four, Westpac and Commonwealth Bank of Australia were quick to follow the central bank's lead on Tuesday, while the ANZ followed on Wednesday. NAB's rates are under review.
Senator Wong said the RBA rate cut was a "very good result" for mortgage holders.
"The government has insured that the bank has space to move given our very clear fiscal consolidation strategy," she told ABC radio.
But Mr Hockey disagreed, saying that nowhere in the RBA's statement did it refer to anything the government had done as one of the reasons why it was reducing interest rates.
"Interest rates would not be as high as they are today if the government wasn't spending so much money," he said.
But he agreed that there was no reason why banks could not pass on the rate cut in full.
"The banks have said to me privately that if Europe does deteriorate, obviously it will have an impact on their cost of funds, but at the moment it is a manageable cost," he said.
