RBA cuts key rate to 2.75%, narrowing gap with NZ

A narrower gap lifts the appeal of the kiwi, especially with traders betting the next move here will be an increase.

The Reserve Bank of Australia cut its key interest rate to within 25 basis points of New Zealand's benchmark, sending the kiwi higher against the Australian dollar as inflation tracks lower than the central bank expected and global growth remains 'below trend'.

The RBA cut its cash rate to 2.75 percent, the first cut since its December 5 decision. Governor Glenn Stevens said his board's forecast is for inflation to be consistent with its target over the next two years. Annual inflation is running at about 2.5 percent.

"Recent data on prices confirm that inflation is consistent with the target and, if anything, a little lower than expected," Ms Stevens says in his statement. The board "judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target".

The Australian dollar "has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time", he says.

The Australian dollar fell to $US1.0180 from $US1.0239  immediately before the statement.

The kiwi climbed as high as 83.50 Australian cents, the highest since January 2009, from 83.16 cents before the decision, which narrowed the gap with New Zealand's 2.5 percent official cash rate.

A narrower gap lifts the appeal of the kiwi, especially when traders are betting the next move by the Reserve Bank of New Zealand will be an increase.

Mr Stevens says the global economy is likely to grow "a little below trend" in 2012 before picking up in 2014. US growth is "moderate", while China's is running "at a more sustainable, but still robust, pace".

He noted Japan's new stimulus measures, including the Bank of Japan's huge bond buying programme, and that the euro zone remains in recession.

Australian employment growth has lagged behind growth in the labour force, though the jobless rate is still relatively low, he says.

"Growth of labour costs has moderated slightly over recent quarters while productivity appears to be improving."

Mr Stevens repeated that the peak in the level of resources sector investors is likely to be this year. Elsewhere in the economy, consumption is growing and there is "a modest firming" in housing investment.