Australia's central bank cut its benchmark cash rate by 25 basis points to 2.25 percent, as expected by some but not all economists, saying this should "add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target."
The Reserve Bank of Australia (RBA), which last cut its rate in August 2013, said the fall in energy prices was likely to offer significant support to consumer spending but there will also be a fall in overall income due to the decline in terms of trade from lower export prices of commodities.
"Overall, the bank's assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected," RBA Governor Glenn Stevens said in a statement.
Australia's economy expanded by only 0.3 percent in the third quarter of 2014 from the second quarter for annual growth of 2.7 percent, unchanged from the second quarter.
Although the unemployment rate eased slightly to 6.1 percent in December from 6.2 percent, it remains at highs not seen since 2003.
Stevens said growth in labour costs remain subdued, so inflation is likely to remain in line with the central bank's 2-3 percent target over the next one to two years, even with a lower exchange rate. Australia's consumer price inflation in the fourth quarter fell to 1.7 percent from 2.3 percent in the third quarter.
The Australian dollar - known as the aussie - has been depreciating against the U.S. dollar since September 2014 and fell further following the rate cut. It was trading around 1.30 to the dollar today, down 14 percent since the start of 2014 and 6 percent since the start of this year.
But Stevens said the aussie remains above "most estimates of its fundamental value" and repeated that "a lower exchange rate is likely to be needed to achieve balanced growth in the economy."
The Reserve Bank of Australia issued the following statement by Governor Glenn Stevens: