RBA chops cash rate back to 3.5 per cent

The Reserve Bank of Australia cut 25 basis points from its target cash rate as deteriorating market sentiment and an uncertain international environment keep interest rate expectations low.

The RBA cut its benchmark interest rate to 3.5 per cent, having sliced half a percentage point off the rate last month, in line with economists' expectations.

Governor Glenn Stevens said financial market sentiment had deteriorated over the past month as Europe's ongoing sovereign debt crisis sapped optimism and created uncertainty about the stability of that region's banking sector.

"Long-term interest rates faced by highly rated sovereigns, including Australia, have fallen to exceptionally low levels," Stevens said.

The central bank surprised markets last month when it cut 50 basis points from the cash rate as a lower inflation track across the Tasman gave greater scope for looser monetary policy.

Traders are betting the RBA will slash 138 basis points from the benchmark rate over the next 12 months, according to the Overnight Index Swap curve.

The New Zealand dollar fell to A77.45c from A77.69c before the decision was released.

The Australian dollar strengthened to US97.83c from US97.52c immediately before the announcement.

The RBA said global growth had slowed since the second half of last year, and faced further risks from any deterioration in Europe and more moderation in China.

"Conditions in other parts of Asia have largely recovered from the effects of last year's natural disasters, but the ongoing trend is unclear and could be dampened by slower Chinese growth," Stevens said.

"The United States continues to grow at a moderate pace."

Australian households and businesses continued to "exhibit a degree of precautionary behaviour which may continue in the near term" and the central bank is picking modestgrowth.

The RBA expects inflation to stay at the low end of a range between 2 per cent and 3 per cent for the coming one or two years, excluding the impact of a carbon price.