Australia's central bank cuts key rate 50 points on lower inflation track

File photo / Thinkstock
File photo / Thinkstock

The Reserve Bank of Australia cut its cash rate a greater-than-expected 50 basis points saying the track of inflation is weaker than expected and a persistently high currency is slowing output growth. The Australian dollar dropped more than half a US cent.

The RBA cut the cash rate to 3.75 percent from 4.25 percent in the biggest move since May 2009 and following quarter point reductions in November and December last year.

Economists had expected a cut of 25 basis points today, according to a Reuters survey.

The central bank kept the cash rate unchanged last month, saying it wanted more time to assess the pace of inflation before moving on interest rates. It got the evidence it needed last week that inflation was benign, with the consumer price index rising just 0.1 percent in the first quarter.

Over the next one to two years "inflation will probably be lower than earlier expected, but still in the 2-3 percent range," Governor Glenn Stevens said in today's statement. Economic figures since the bank's last rate cut in December "suggests that it is now appropriate for a further step in that direction."

The Australian dollar fell to US$1.0324 after the statement from US$1.0411 immediately before. The New Zealand dollar strengthened to 78.82 Australian cents from 78.35 cents. Australia is New Zealand's biggest export market and the RBA's move narrows the gap with New Zealand's 2.5 percent official cash rate.

Australia's economy grew at 0.4 percent in the first quarter, half the pace expected. The nation's economic fortunes are tied to China, the biggest buyer of the iron ore and other raw resources, where growth is being managed down by Beijing.

"Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future," Stevens said. Other parts of Asia have shown "tentative" signs of improvement while conditions in Europe "remain very difficult and the US "continues to grow at a moderate pace," he said.

Global growth "is likely to continue at a below-trend pace this year" though a deep downturn isn't occurring, he said.

In Australia, credit growth "remains modest overall" and the housing market remains subdued although the market "remains subdued."

"The exchange rate remains high even though the terms of trade have declined somewhat," he said. A cut in the cash rate of 50 basis points was deemed necessary to deliver the appropriate level of borrowing rates.

- BusinessDesk

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