The Reserve Bank of Australia cut its cash rate on Tuesday at its February meeting, with the decision premised on the central bank's downgraded growth outlook and the impact of falling oil prices.
The Monetary Policy Board lowered the cash rate to 2.25 percent from 2.5 percent. The markets were divided over their expectations concerning a rate cut, although the equity market did price in a rate cut and advanced on Monday despite the broad based weakness in Asia.
Ahead of the decision, the cash rate had been maintained at 2.5 percent since August 2013.
The bank said that commodity prices declined sharply and that the price of oil has fallen significantly over the past few months.
These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates, the bank noted.
The RBA revised its view on financial risks and said, "Some risk spreads have widened a little but overall financing costs for creditworthy borrowers remain remarkably low, "
The bank also assessed Australia's growth as "below-trend" after calling it "moderate" in the previous statement. The bank attributed this to weak domestic demand growth.
The economy is likely to be operating with a degree of spare capacity for some time yet, the bank said.
At today's meeting, taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate, the RBA said.
The bank added that this action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.
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