Members of the Reserve Bank of Australia's monetary policy board said that the Australia economy is continuing to grow slightly below the expected trend, minutes from the bank's May 1 meeting revealed on Tuesday.
The current boom from the mining sector continues to gain momentum, the minutes said - but overall, the financial environment remains uncertain.
"Credit growth for households had been marginally lower over the past year than over the previous year, and business credit was rising at only a very modest rate," the minutes said. "Elevated competitive pressures had kept deposit rates in Australia high relative to the cash rate. At the margin, wholesale funding costs had declined over recent months, though they remained higher, relative to benchmark rates, than in mid 2011, and the lagged effects of this were still working their way through the funding structure."
The members felt that a cut in interest rates was warranted in order to offset higher bank rates - and that course of action was sealed by the belief that inflation is likely to remain subdued.
"The staff assessment was that inflation was likely to remain in the lower half of the target range over the foreseeable future, with cost pressures expected to be contained given the forecast for moderate growth in the economy," the minutes said. "This forecast assumed that the soft conditions currently being experienced would lead to lower growth in unit costs."
At the meeting, the cash rate was slashed by 50 basis points to 3.75 percent in a bid to support economic growth. The rate cut was steeper than the 25 basis point-reduction expected by economists.
The board judged the size of the adjustment "desirable" and said it is necessary in order to deliver the appropriate level of borrowing rates.
Looking at the world economy, the central bank said global growth may continue to be below-trend this year, but a deep downturn is not occurring at this stage. Growth in China, one of Australia's major trading partners, has moderated and is likely to remain at a more measured and sustainable pace in the future.
Economic conditions in Asia had softened, and the U.S. economy continued to grow moderately. But the situation in Europe still remained difficult.
"The U.S. economy had continued to expand at a moderate pace," the minutes said. "Indications were that growth had slowed to a more sustainable pace in China, and activity had generally picked up elsewhere in east Asia. Even so, activity in the euro area was still contracting. Global inflation pressures remained subdued, despite some boost to headline measures from elevated oil prices. With financial markets remaining unsettled, the risks emanating from Europe continued to cloud the global outlook."
Upon the release of the data, the Australian dollar dipped against most major counterparts.
The Aussie reached a new four-month low of 79.41 against the yen and a new seven-month low of 0.9988 against the Canadian dollar. The next downside target level for the Aussie is seen at 78.5 against the yen and 0.9950 against the loonie.
Against the greenback, the Aussie dipped below parity to the level not seen since December 20, 2011, falling to 0.9948. The Aussie dropped to 1.2890 against the euro with 1.29 seen as the next downside target level. The pair finished Monday's deals at 1.2882.
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