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RBA cuts cash rate another 25 basis points; currency gains

Tuesday 5th June 2012

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The Reserve Bank of Australia cut 25 basis points from its target cash rate as deteriorating market sentiment and an uncertain international environment keep interest rate expectations low.

The RBA cut its benchmark interest rate to 3.5 percent, having sliced half a percentage point off the rate last month, in line with economists' expectations. Governor Glenn Stevens said financial market sentiment has deteriorated over the past month as Europe's ongoing sovereign debt crisis saps optimism and created uncertainty about the stability of that region's banking sector.

"Long-term interest rates faced by highly rated sovereigns, including Australia, have fallen to exceptionally low levels," Stevens said in a statement.

The central bank surprised markets last month when it cut 50 basis points from the cash rate as a lower inflation track across the Tasman gave greater scope for looser monetary policy. Traders are betting the RBA will slash 138 basis points from the benchmark rate over the next 12 months, according to the Overnight Index Swap curve.

The New Zealand dollar fell to 77.45 Australian cents from 77.69 Australian cents before the decision was released. The Australian dollar strengthened to 97.83 US cents from 97.52 cents immediately before the announcement.

The RBA said global growth has slowed since the second half of last year, and faced further risks from any deteriorating in Europe and more moderation in China.

"Conditions in other parts of Asia have largely recovered from the effects of last year's natural disasters, but the ongoing trend is unclear and could be dampened by slower Chinese growth. The United States continues to grow at a moderate pace," Stevens said.

Australian households and businesses continue to "exhibit a degree of precautionary behaviour which may continue in the near term" and the central bank is picking modest growth across the Tasman.

Last week, figures showed Australian retail sales shrank 0.2 percent in May, missing the 0.2 percent growth expected by economists as the so-called 'lucky country' contends with a two-speed economy where its resources sector remains strong while its service sector and household demand remain subdued.

The RBA expects inflation to stay at the low end of a range between 2 percent and 3 percent for the coming one or two years, excluding the impact of a carbon price.

"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," Stevens said.

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