RBA to reduce benchmark interest rate by 25bps in near term

The Reserve Bank of Australia set its benchmark interest rate at the record low level of 2.0 percent indicating accommodative monetary conditions over the forthcoming quarters. The policymakers see possibilities for further policy easing as long as the inflation is below the economy's target level.

Consumer price inflation increased marginally to 1.7% y/y in the fourth quarter of 2015, falling short of the central bank's target of 2-3 percent.  Headline inflation is expected to grow moderately during this year and is likely to end this year around 2.5 percent y/y as the AUD continues to depreciate over rising import prices.

Real GDP growth is likely to remain relatively weak on the back of spare capacity, reflecting low iron ore prices and weaker Chinese demand. However, improvement in global demand is expected to strengthen Australia's growth next year.

"We expect a 25 basis point reduction in the benchmark interest rate to take place in the near term, followed by an extended period of stable monetary policy conditions", said Scotiabank in a research note. "We expect that output will expand by 2.6% in 2016, underpinned by domestic demand, following an estimated 2.3% advance last year."