Aussie interest rate cut by a quarter point

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The Reserve Bank of Australia has cut its key interest rate, citing weaker commodity prices in a global market where the outlook for economic growth "has softened".

The Australian dollar has dropped against the greenback and the New Zealand dollar.

"The outlook for growth in the world economy has softened over recent months, with estimates for global GDP being edged down, and risks to the outlook still seen to be on the downside," Governor Glenn Stevens said in a statement published on the RBA website.

"Key commodity prices for Australia remain significantly lower than earlier in the year, even though some have regained some ground in recent weeks," he said.

The Australian dollar dropped to US$1.0309 after the statement was released, from US$1.0368 immediately before. The kiwi dollar gained to 80.35 Australian cents from 79.86 cents.

Australia is having to contend with falling prices for raw materials such as coal and iron ore which are among hard commodities that are declining just as prices for New Zealand's mainly food priced commodities is gaining, with a 3.5 per cent increase last month. Still, the RBA's move is likely to fan calls for the Reserve Bank of New Zealand to follow suit and cut the official cash rate from 2.5 per cent.

Stevens reiterated his view that European economic activity is contracting, while growth in the US "remains modest." Growth in China, the biggest market for Australian exports, has slowed and "uncertainty about near-term prospects is greater than it was some months ago."

"Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe," he said.

In Australia, most indicators suggest the economy is "running close to trend," with large increases in capital spending in the resources sector."

The central bank reckons the peak in investment in the resources sector is likely to occur next year, and may be at a lower level than earlier expected.

"As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur," Stevens said.

There had been tentative signs of improvement in investment in homes while commercial building remained weak.

Labour market data have shown moderate employment growth though in the bank's assessment, "the labour market has generally softened somewhat in recent months."

Inflation remains low and will remain consistent with the RBA's target over the next one to two years.