RBA cites weaker economy in decision to cut policy rate

The Reserve Bank of Australia (RBA) has slashed its benchmark cash interest rate by 50 basis points to 3.75% in a bid to spur the economy after the release of weaker-than-expected economic growth.

RBA governor Glenn Stevens said that, while a "deep downturn" in the global economy had not yet taken place, there remained significant threat of "adverse shocks" to the Australian economy from the eurozone sovereign debt crisis.

The RBA was given some room to manoeuvre as inflation remained below 2%, which is the lower end of the central bank's target band of 2–3%. Stevens said he expected inflation would be lower than previously expected for the next "two to three years" but that it would remain within the target band.

The RBA last cut its cash rate in December, with a 25-basis point cut to 4.25%. The central bank took the view at the time that this rate left enough scope for future monetary policy easing to support future demand should economic conditions warrant it.

The central bank, in its statement announcing the latest cut to 3.75%, said "the accretion of evidence over recent months suggests it is now appropriate for a further step in that direction".

Marc Otswold of Monument Securities said the latest rate announcement showed the RBA was in "wait and see mode" and that it is concerned about domestic demand in Australia outside the resources sector.