With the inflation outlook emboldening policymakers to relax monetary policy further, the Reserve Bank of Australia decided to slash its official cash rate, given the deteriorating global environment and weak domestic growth.
The board of the central bank announced on Tuesday a 25 basis point reduction in the cash rate to 3.5 percent, as expected by economists. The central bank started its easing cycle in November last year. The previous reduction was in May, when the rate was cut by 50 basis points to 3.75 percent.
Westpac expects more rate reductions to follow, going by the series of observations the central bank made on the world economy and the domestic economy. The firm sees further 25 basis point reductions in July and August and a final 25 basis point downward adjustment in the December quarter.
The new rate will be effective from June 6. The policy board of the central bank said in a statement that "with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy."
Last month, the RBA cut its GDP growth projections for the Australian economy to 3 percent in 2012 and 2013.
Announcing the decision, RBA Governor Glenn Stevens said inflation is expected to be in the 2-3 percent target range over the coming one to two years. In the near term, it is likely to be in the lower part of that range, though maintaining low inflation over the longer term will require growth in domestic costs to slow as the effects of the earlier high exchange rate wane, he added.
Referring to the global economic developments, Stevens said recent indicators suggest further weakening in Europe and some further moderation in growth in China.
Asia has largely recovered from last year's natural disasters, but the ongoing trend is "unclear and could be dampened by slower Chinese growth," he said. Meanwhile in Europe, economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks, Stevens observed.
The deepening Eurozone debt crisis have affected global growth and stifled world trade. Leaders of the Group of Seven industrialized nations have called an emergency meeting on Tuesday to discuss the worsening situation in Europe, especially in Spain.
by RTT Staff Writer
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