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Australia cuts rates by 25 basis points to record low of 2.5%

Tuesday, 6 Aug 2013 | 12:31 AM ET
Reserve Bank of Australia (RBA) headquarters in Sydney, Australia.
Dan Himbrechts | Bloomberg | Getty Images
Reserve Bank of Australia (RBA) headquarters in Sydney, Australia.

The Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to a record low of 2.5 percent on Tuesday, as widely expected.

This is the eighth rate cut since November 2011 when the central bank first acknowledged a growth slowdown as the country's decade-long mining boom began to fade.

"Today's rate cut reflects how the interest-sensitive, non-mining sectors of the economy need more juice," Katrina Ell, associate economist at Moody's Analytics told CNBC of the RBA's move.

(Read more: Australia to hold election on September 7)

"Outside of residential property, the response to the RBA rate cuts so far has been disappointing. Retail trade is weak, unemployment has been drifting higher and investment outside of mining has been perennially weak," she added.

What the RBA's rate cut means for the economy
Ric Spooner, Chief Market Analyst at CMC Markets & Tom Rogers, senior economic adviser, Ernst & Young discuss the RBA's decision to cut interest rates by 25 basis points.

Markets are expecting the central bank to retain a dovish tone throughout this year as growth in China, Australia's largest trading partner, continues to slow.

In a speech last week, RBA governor Glenn Stevens signaled the need to ease monetary policy further noting the slumping economy and a benign inflation picture, prompting analysts to predict at least another rate cut before the year is out.

(Read more: For Australia, 'R' may not mean recession)

But Paul Bloxham, chief Australia and New Zealand economist at HSBC, disagrees with the view, believing the RBA is done with its rate-cutting campaign.

"I think one of the most interesting things in the statement is that it seems a little less dovish than previous statements as they didn't explicitly indicate that the inflation outlook provided them with scope for further easing from here, and that's indeed consistent with our own view," he said.

"We think today's cut could be the last for the easing phase of this cycle as interest rates are already low and the Aussie dollar is providing support for the economy," Bloxham added.

How much pain is in store for the Aussie?
Robert Rennie, global head of FX strategy at Westpac Bank, thinks the currency has priced the Reserve Bank of Australia's 25 basis point interest rate cut on Tuesday.

The Australian dollar gained nearly half a percent against the greenback on the news to $0.897, after setting a three-year trough of $0.8848 on Monday.

(Read more: No 'Armageddon' for miners: Western Australian Premier)

The resources-linked currency has fallen 14 percent against the greenback this year, in tandem with a broad-based selloff in commodities and on concerns over a slowdown in Chinese economic growth.

Ric Spooner, chief market analyst at CMC Markets Asia Pacific said the RBA is always quick to point out that they don't have a currency target, but in terms of the Australian dollar doing enough to boost the domestic economy, they do want it to head much lower from the current level.

"I think they'd be very comfortable in seeing it in 80-85 cent range and I don't think they'd be very bothered about it overshooting to the downside into the 70s (cent range) at least for a while," Spooner said.

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