The Reserve Bank of Australia, as expected, lowered the cash rate by 25 basis points to a fresh record low of 0.75% while signaling that rates could fall further in order to drive inflation higher and support growth.
"Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation," RBA Governor Philip Lowe said.
"The economy still has spare capacity and lower interest rates will help make inroads into that," Lowe added.
The Australian economy grew at a weaker-than-expected rate of 1.4% year over year in the three months to June, though Lowe noted that "a gentle turning point" in the domestic economy appears to have been reached. He added that the outlook for consumption remains the key domestic uncertainty.
Employment growth is expected to slow, while the rate of wage increase remains subdued with "little upward pressure at present," Lowe said.
As a result, weak inflationary pressures are likely to persist for some time. The central bank maintained its expectations that headline and underlying inflation will come in at a little under 2% over 2020 and a little above 2% in the succeeding year.
With the rate cut, the RBA is now left with only three or even fewer conventional cuts before it will have to resort to unconventional tools, namely negative rates, quantitative easing or bond yield targeting, said Robert Carnell, Asia-Pacific chief economist and head of research at ING.
"With the economy, according to Governor Lowe, at a turning point, this latest cut may turn out to have been unnecessary," Carnell added.
The Australian dollar fell 0.3% versus its U.S. counterpart as of 1:03 a.m. ET.
