RBA cuts official interest rate by 50 basis points to 3.75%

The Reserve Bank has cut the official interest rate by 50 basis points to 3.75%  at its meeting this afternoon, in a shock move that exceeds economists’ expectations who largely predicted a cut to just 4%.

The move comes after weak economic data, including inflation, housing and manufacturing figures, influenced economists to predict a slash in the official cash rate.

Governor Glenn Stevens said economic conditions had been weaker than expected.

In a statement, he noted the world economy is likely to continue at a below-trend pace this year, but that while financial market sentiment has improved, it’s still “skittish”.

“The tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.”

In the domestic economy, Stevens noted output growth has been below trend over the past year, affected by the persistently high exchange rate. He also said housing prices have remained subdued, and the dollar remains high even though terms of trade have declined.

“Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand.”

“The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.”