SYDNEY: Australia’s central bank on Tuesday lowered its key interest rate by 25 basis points to a new record low of 2.25 percent, saying after a year-and-a-half on hold the cut was justified to spur growth.
The Reserve Bank of Australia said the economy was expanding at a below trend pace and inflation was low, while unemployment had risen in the past year and was expected to climb further.
The Australian dollar plunged to 76.61 US cents after the announcement, from around 78 cents before. However, the S&P/ASX 200 stock index surged 1.41 percent in afternoon trade.
“At today’s meeting, taking into account the flow of recent information and updated forecasts, the board judged that, on balance, a further reduction in the cash rate was appropriate,” RBA governor Glenn Stevens said.
“This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.”
The fall in global oil prices, which has delivered lower costs for Australian consumers at the petrol pump, had left some economists predicting the bank would leave rates on hold.
Others suggested a drop in rates could add to the risk of a housing bubble.
But the RBA said it was “working with other regulators to assess and contain economic risks that may arise from the housing market”.
The bank said the Australian dollar, which has fallen against the US dollar in recent months, still remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices.
“A lower exchange rate is likely to be needed to achieve balanced growth in the economy,” the RBA said.
Economists said while the rate reduction had surprised, the RBA’s decision and the likelihood that the economy will continue to slow indicate more cuts will follow.