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RBA interest rate decision takes experts by surprise

The Reserve Bank of Australia has delivered the result of its monthly board meeting.

The board has surprised the market by reducing the cash rate to a record-low 1.75 per cent.

All 31 commentators surveyed by comparison website finder.com.au had expected the cash rate to remain at 2 per cent, where it has been since May.

Many of the experts felt that it was too early for another rate cut, given that the Reserve Bank lowered the cash rate by 0.25 per cent in February and by the same amount in May.

Board members had been facing two conflicting pressures: to cut rates to stimulate the sluggish economy or to lift rates to cool the Sydney and Melbourne housing markets.

They may have felt they had room to move given that APRA, the prudential banking regulator, has recently moved to reduce investor lending and make mortgage lending more expensive for five key banks. Both decisions are likely to slow property price growth.

Low inflation would have also made it easier to cut rates – it is currently running at 1.5 per cent, which is below the Reserve Bank’s target band of 2-3 per cent.

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The big question is whether the next move in rates will be up or down. Another rate cut is unlikely, but it will remain possible while the economy remains weak.

Before today’s announcement, 19 of the 31 respondents forecast that the next move in rates would be up. Two said it would happen in the second half of 2015, five said it would happen in the first half of 2016 and 12 said it would happen in the second half of 2015.

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