Central Banks

RBA cuts cash rate by 25 basis points to 1.75%

RBA slashes benchmark interest rate
RBA slashes benchmark interest rate

The Reserve Bank of Australia (RBA) jolted financial markets by cutting interest rates to a new record low, as the central bank strives to counter the adverse economic impact of feeble inflation.

The RBA cut its cash rate by 25 basis points to 1.75 percent. The move was a surprise - only 18 out of 51 analysts polled by Reuters had expected a cut.

The RBA noted that the global economy was growing at a slightly lower pace than previously expected, while Australia's terms of trade also remained lower than what they had been in recent years.

The central bank particularly expressed concern with inflation, which has stayed stubbornly low.

What to expect from the Australia budget?
What to expect from the Australia budget?

"Inflation has been quite low for some time and recent data were unexpectedly low," the RBA said.

"While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast."

Will they or won't they? RBA cash rate in focus this week

Financial markets were caught by surprise by the decision. In the wake of the decision, the benchmark ASX 200 climbed 1.53 percent, compared with gains of around 0.55 percent before the decision.

The Australian dollar dropped to as low as $0.7572 after the decision, from levels a tad above $0.77 before the announcement. The Australian dollar recovered a bit to fetch $0.7585 at 12:43 p.m. HK/SIN time.

Richard Yetsenga, head of global markets research at ANZ said it still wasn't clear how much the RBA would cut rates further.

"They did speak about housing from the perspective of arguing that some of the prudential controls meant they were a bit less worried about further rate cuts than they might have been previously, but I think it still goes to show that it wasn't a done deal that the bank was going to cut today," Yetsenga told CNBC's "Capital Connection".

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