Australia cuts on signs of slower growth ahead

The Reserve Bank's rate-setting board cut the benchmark cash rate from 7.25% to 7% on Tuesday. Glenn Stevens, the governor of the Reserve Bank, said after the decision that "tight financial condition, in conjunction with other factors including higher fuel costs and low asset values, have exerted the needed restraint on demand."

The governor noted favourable data on household spending, credit expansion and capacity utilisation. He also cited surveys suggesting a softening of business activity and a slowing in production growth, and signs of an easing in labour market conditions.

A rise in exports, the continued buoyancy of business investment and the threat of further surges in commodity prices presented upside risks to inflation. However, the governor said that it was "looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead."

At 4.5% in June, annual inflation is still significantly above the central bank's target and is set to remain high in the short term. But the Reserve Bank believes it will fall back to target by 2010 so long as wage inflation remains moderate.

The central bank raised rates to 7.25% in March, a decision sharply criticised by many Australians, including Bernie Fraser, a former governor of the Reserve Bank .

Tuesday's decision was widely expected.

The Reserve Bank indicated after its August vote that it would cut before the end of the year.

Ric Battelino, the deputy governor at the Reserve Bank, said in mid-August that high interest rates had tempered domestic demand to the extent that the central bank was now "in a position to cut interest rates" and that the institution "cannot wait to see a fall in inflation."

The governor indicated that rates will fall further in the coming months, saying: "The board judged that there was now scope for monetary policy to become less restrictive."

Click here to read the central bank's statement