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Reserve Bank of Australia cuts rates to fresh record low of 1.50 percent

The Reserve Bank of Australia (RBA) cut its benchmark interest rate by 25 basis points on Tuesday to a fresh record low of 1.50 percent amid signs of slowing economic growth.

The move was widely expected, with 36 out of 47 economists surveyed by Reuters expecting a rate cut.

"The global economy is continuing to grow at a lower than average pace," the RBA said in a statement. "In Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment."

But inflation was low and appeared likely to remain so, the central bank said.

"The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy," the RBA said.

The RBA added that the recent strength in the Australian dollar could "complicate" efforts to adjust the economy. The country has been working to transition away from relying on commodity exports, which have suffered from declining prices and demand, and toward domestic drivers.

Economists have expressed concern about the strength of the Australian dollar.

"The comment that an appreciating dollar could 'complicate' things is an understatement as a stronger dollar would make it much harder for the bank to raise inflation back within its 2-3 percent target range," noted Paul Dales, chief Australia and New Zealand economist at Capital Economics, in a note after the decision. "Lower rates are the best way to weaken the Australian dollar."

Analysts noted, however, that much of the Aussie dollar's strength was related to inflows chasing the country's bond yields, which offered a positive return even as many government bond yields have turned negative.

The currency is "a little overvalued" when compared with factors such as commodity prices and terms of trade, Andrew Ticehurst, a rate strategist at Nomura Australia, told CNBC's "Capital Connection" after the RBA decision was announced. .

"The risk is that the Australian dollar continues to trade north of fair value because of those very low cash rates elsewhere and capital inflow that we've seen here," he said, noting that he put the Aussie's fair value at $0.70.

The Australian dollar dropped as low as $0.7495 after the decision was announced, compared with $0.7544 just before the RBA released its statement. But it quickly recovered to trade around $0.7545 at 2:00 p.m. HK/SIN. That's up from levels under $0.70 in January.

Capital Economics' Dales noted that the RBA's statement didn't contain any hints that further rate cuts could be on the cards. He expected rates would need to be cut to as low as 1.00 percent to push the Aussie dollar significantly lower.

The S&P/ASX 200 didn't move much immediately after the decision, trading down 0.33 percent, having fallen 0.59 percent before the announcement. After rising more than 6 percent since the beginning of July, stocks may have already been pricing in a rate cut.

Ticehurst said it wasn't clear how well Australia's economic transition was proceeding.

"It's time to move beyond the question of is the economy transitioning yes/no to what kind of transition are we making," he said. "As we look at the data, we see a shift to lower paid service sector and part time jobs. We are making a transition, but it's not a transition to a booming economy, with high paying full time jobs. So there's reason for caution here."

There were indications that gross domestic product (GDP) growth might be slowing.

Flag of Australia on a beach
Getty Images
Flag of Australia on a beach

In a separate note prior to the RBA statement, Dales said data released earlier Tuesday suggested second-quarter GDP growth may have slowed to less than 0.5 percent on-quarter, from the first quarter's 1.1 percent expansion.

Building approvals fell 2.9 percent on-month in June, seasonally adjusted, compared with a Reuters poll forecast for 0.5 percent growth, according to data released earlier Tuesday.

In addition, Australia's trade deficit came in at 3.20 billion Australian dollars ($2.4 billion) earlier Tuesday, much wider than that 2.0 billion Australian dollars forecast in a Reuters poll and wider than May's revised 2.4 billion Australian dollars reading. Exports for June fell 1 percent on-month, seasonally adjusted, while imports rose 2 percent, according to data from the Australian Bureau of Statistics.

"Net exports are unlikely to remain as soft in the second half of the year, but these data highlight that the external sector can't drive growth on its own," Dales said.

Inflation data released last week also indicated the economy might be slowing.

In the June quarter, Australia's consumer price index growth slowed to 1 percent on-year, compared with the 1.3 percent in the March quarter, and an RBA target of 2-3 percent.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1