The Reserve Bank of Australia (RBA) cut the official cash rate (OCR) by 25 basis points to a record low 1.75% at its board meeting today.
The Australian dollar dropped by more than US1 cent to US75.91 cents after the announcement, having been back above US77 cents today, and at US75.91 cents last Wednesday.
Before the announcement, the Australian Securities Exchange (ASX) RBA Rate Indicator was showing a 53% expectation of a cut to 1.75% and a 47% chance of rates being held at 2%.
The RBA Rate Indicator shows market expectations of a change in the OCR based on market prices in the ASX 30-day Interbank Cash Rate Futures.
Inflation and housing market impact decision
Expectations of a rate cut rose last week after the Consumer Price Index (CPI) – the main measure of inflation in Australia – fell by 0.2% in the March quarter, well below expectations of a 0.3% rise.
The last official rate move was a 25 basis point cut 12 months ago in May last year.
In announcing today's decision, RBA Governor Glenn Stevens said the Board took "careful note" of developments in the housing market, adding that there are indications supervisory measures are strengthening lending standards and price pressures have "tended to abate".
CommSec economist Savanth Sebastian said in a note that the focus for policymakers is now "attempting to navigate a low inflationary environment and support non-mining business investment. No doubt the Aussie dollar will remain in focus given the recent volatility."
Continuing low mortgage rates, firm population growth and strong demand for housing are combining to drive construction and related employment growth.
Residential building approvals unexpectedly rose by 3.7% in March, with annual approvals at 232,200.
"The March data confirms that record levels of construction will continue well into 2016," CommBank senior economist John Peters said in a note.
Impacts on the Aussie dollar
The local currency remained lower through the afternoon, having slumped as much as 1.7% following the RBA rate cut announcement.
The move was "exacerbated by a ½ US cent lift by the AUD a few hours before the RBA announcement" which "reflected positioning" ahead of the rates change, explained CommBank currency strategist Joseph Capurso.
In the RBA's statement released after the announcement, governor Glenn Stevens said the decision to cut the cash rate was because "inflationary pressures are lower than expected".
The RBA added that "recent (inflation) data were unexpectedly low. While the quarterly data contains some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast."
The RBA provided no guidance as to future direction of the official cash rate.
CommBank's Capurso, however, said that he anticipates another 25 basis points interest rate cut could follow at the August meeting, which comes after the next quarterly inflation outcome.
"The risk [to AUD volatility] is the next RBA rate cut comes before August if there is a deterioration in the local economic data, particularly the labour market," Capurso said in a note.
"We are not changing our currency forecasts and continue to look for AUD/USD at US78 cents at year-end and US80 cents by mid-June 2017.
"We don’t believe today’s interest rate decision changes the pressures on that currency forecast because we believe the improvements in the Australian economy, recovery in commodity prices and softening USD will support the AUD over this time frame."