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Australian central bank cuts rate to record low in bid to support economy

The Reserve Bank of Australia cut its cash rate by 25 basis points to a new record low of 1.25%, saying a lower rate will help accelerate a reduction in unemployment and bring inflation toward its target.

The Australian dollar rose to as much as 69.9 U.S. cents shortly after the widely expected monetary policy decision, before paring gains to trade broadly flat at about 69.8 cents as of 1:30 a.m. ET on June 4. The cut marks the first movement in the cash rate since August 2016.

While employment growth has been strong over the past year, there has been "little further inroads" into spare capacity in the labor market, with the unemployment rate hovering at around 5% in recent months before ticking up to 5.2% in April, the central bank noted. The Australian economy "can sustain a lower" unemployment rate, it added.

Meanwhile, inflation has recently missed expectations but is still expected to increase in the second quarter as a result of higher petrol prices. The central bank continues to expect underlying inflation to reach 1.75% in 2019 before accelerating to 2% next year and rising "a little higher" afterward.

Australian GDP is expected to grow at about 2.75% in 2019 and 2020, according to the RBA. The outlook for household consumption remains the main domestic uncertainty, the central bank said, as a prolonged period of low wage growth and declining house prices weigh on consumer spending.

Meanwhile, the global economic outlook remains reasonable though downside risks from trade disputes have increased, with uncertainty affecting investment intentions in several countries.