For the first time in 12 months, the Reserve Bank of Australia (RBA) has announced it cut the cash rate by 25 basis points to 1.75 per cent.
The RBA's decision to cut the official interest rate comes after a surprisingly low inflation figure of 1.3 per cent year-on-year was released last Wednesday.
The ASX futures market has been pricing in a 50/50 chance of a rate cut to 1.75 per cent versus 'no change' since the release of the inflation figures.
With a target inflation rate of between 2-3 per cent, concerns about a lack of growth in the Australian economy spurred by the low Consumer Price Index readings appear to have forced the RBA's hand.
HSBC chief economist Paul Bloxham said the low inflation numbers had made a May rate cut likely, despite the fact that the federal budget is on the same day.
"The RBA's preferred measures of underlying inflation both fell well short of market expectation and are tracking well below the RBA's last set of forecasts," Mr Bloxham said.
"These core measures of inflation have also declined to be convincingly below the bottom edge of the RBA's 2-3 per cent target band," he said.
The RBA was in a "tricky spot" leading up to its decision today, given that the unemployment rate have been falling and business confidence improving.
"However, although growth has been solid, it has not been strong enough to keep inflation on target," Mr Bloxham said.
"All of this adds up to suggesting that the RBA will need to cut its cash rate further. It now also seems likely that a 25 basis point cut may not be enough," he said.
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