Australia Cuts Interest Rate To Record Low 2%

Australia's central bank has moved to stimulate the country's economy by cutting its benchmark interest rate to a record low of 2%.

The move by the Reserve Bank of Australia (RBA) to cut a quarter percentage point was the latest response to falling commodity prices and weakening demand from China.

It was forecast by most economists, though many had thought the RBA would wait until after the release of the government's new budget next week.

The resource-rich country, which managed to avoid recession during the financial crisis because of a mining boom, is heavily dependent on demand for commodities such as iron ore and coal.

RBA governor Glenn Stevens said that while the global economy was expanding at a moderate pace, commodity prices have declined over the past year - in some cases sharply.

He added: "Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year."

Public spending has been subdued alongside business investment, resulting in a slowdown in GDP growth.

"Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late," Mr Stevens added.

The Australian dollar has declined sharply against a rising US dollar over the past year, though less so against a basket of currencies.

Mr Stevens said further depreciation was "both likely and necessary", particularly given the significant declines in commodity prices.

The Australian dollar fell a quarter of a cent against the US dollar immediately after the announcement but then rebounded as opinion was divided on how effective the rate cut would be on weakening the currency and spurring the broader economy.