Australia's central bank cut its main cash rate yesterday for the first time since the global financial crisis more than two years ago, responding to benign inflation at home and threats to the global economy from Europe's debt emergency.
The Australian dollar slipped and markets priced in further easing after the Reserve Bank of Australia (RBA) cut by 25 basis points to 4.5 per cent.
The RBA said inflation was now likely to be more consistent with its long-term target in both 2012 and 2013.
"The board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2-3 per cent inflation over time," RBA governor Glenn Stevens said in a statement.
The bank last cut rates in April 2009 when it was easing aggressively in response to the global financial crisis.
A Reuters poll last week found 12 of 19 analysts had expected a cut to 4.5 per cent, with the rest tipping no move. Rate futures had priced in around an 80 per cent chance of a cut and still see a move to 4.0 per cent by February.
Economists, however, doubted this was the start of an easing campaign, given Australia's mining sector was still booming.
"They've recognised that inflation is lower and they're a little bit more cautious on the global outlook," said Paul Brennan, head of market economics at Citi.
"It all says it is sensible to bring back policy from restrictive to neutral and they'll keep it on neutral now for an extended period," he said. "Unless there's some big surprises over the next couple of months, I think rates are on hold for quite a while."
The Australian dollar dipped half a cent to US$1.0485 on the decision, though investors might ultimately be relieved that Australia has the good fortune to be able to ease policy and stimulate the economy as needed.
Many of its western peers have run out of scope to cut rates, while facing intense pressure to tighten fiscal policy to curb a mountain of government debt.