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Australia cuts its rates more than forecast to 3.75%

Fruit seller in Sydney
A slowdown in consumer price growth has made it easier for the central bank to cut rates

The Reserve Bank of Australia has cut interest rates more-than-expected because economic conditions were “somewhat weaker” than forecast.

It added that inflation had also moderated in recent months.

The bank cut its key rate to 3.75% from 4.25%. Most analysts were expecting a 0.25 percentage point cut.

There have been increasing signs that Australia‘s economy is being hit by a slowdown in global growth and demand for its resources.

“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated,” the Reserve Bank of Australia (RBA) said in a statement.

“Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year.”

Aggressive support?

One of the biggest headaches facing policymakers over the past year or so has been the fact that Australia was developing a two-speed economy.

While Australia’s mining and resources sector has been booming, the other parts of Australia’s economy have not been doing as well.

Figures out last week only compounded the fears of analysts and politicians.

A report showed that new home sales fell to their lowest level in more than a decade in March. At the same time, home prices have fallen for a fifth straight quarter, while retail sales have shown little growth.

The government welcomed the interest rate move by the central bank.

“This is the interest rate cut that households and small businesses have been hanging out for,” said Wayne Swan, Australia’s Treasurer and Deputy Prime Minister.

“It is very welcome, it is well deserved and it is certainly much needed by households under financial pressure.”

Analysts said that the surprise move by the central bank showed that it was trying to give growth a positive jolt and that it opened the way for more rate cuts in coming months.

“It suggests that the RBA is pretty worried about where growth is headed and some aggressive monetary support was needed,” said Matthew Circosta of Moody’s Economy.

“I think the bias is towards more rate cuts. With the low inflation outlook it gives them scope to cut rates further.

BBC News

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