The Reserve Bank of Australia (RBA), which embarked on an easing cycle in October 2011 and last cut its rate in November 2012, said economic growth had been a little below trend in the second half of last year and this appears to have continued into 2013 with employment growing slower than the labor force so the jobless rate had increased slightly.
"The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time," the RBA said, adding demand for credit was currently "relatively subdued."
Economists had been mixed in their expectations for the outcome of today's RBA policy decision and the Australian dollar fell sharply following news of the rate cut, quoted around 1.02 per US dollar, down from highs around 1.06 in early January.
The RBA, which has now cut rates by 200 basis points since October 2011 to a new historic low, repeated recent statements that the effects of previous easing were continuing to emerge, with savers changing their portfolios toward assets with higher expected returns, rising asset values and higher spending in some areas that are more sensitive to interest rates.
Consumption has also been rising and home investments have firmed modestly with the prospect for higher business investment outside the resources sector over the next year and exports of raw materials were rising as increased capacity comes on stream.
"These developments, some of which have been assisted by the reductions in interest rates that began 18 months ago, will all be helpful in sustaining growth," the RBA said.
Australia's Gross Domestic Product rose by only 0.6 percent in the fourth quarter of 2012, for annual growth of 3.1 percent, the same rate of expansion as in the third quarter.
The unemployment rate rose to 5.6 percent in March, the highest rate since October 2009, and the RBA expects the rate to rise further towards 5.75 percent this year.
The inflation rate has remained in line with the RBA's target of 2-3 percent, but "if anything, a little lower than expected,"the bank said, adding that labour costs had moderated slightly in recent quarters and productivity growth appeared to be improving, holding back prices for non-tradable goods.
Australia's inflation rate rose to 2.5 percent in the first quarter of 2013, up from 2.2 in the fourth quarter of 2012, and the RBA said it expects inflation to remain in line with its target over the next two years.
"The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand," the RBA said, adding:
"At today's meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target."