Australia cuts interest rates to record low

- Cut raises fears of housing bubble as bank looks to stimulate economy

MELBOURNE, Australia (AA) – Australia has cut interest rates for the first time since August 2013 to a record low of 2.25 percent, local media reported Tuesday.

The Reserve Bank of Australia’s decision was designed to stimulate business activity and household spending as the country faces slowing growth, low commodity prices and stagnant investment, the Sydney Morning Herald said.

By lowering the rate, the bank hopes to reduce the cost of credit and boost the economy.

"This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target," the bank said in a statement.

Governor Glenn Stevens highlighted predicted lower growth, declining inflation, global uncertainty and the relative strength of the Australian dollar as reasons for the cut.

The Australian dollar immediately fell to below 77 U.S. cents, its lowest level in more than five years.

Economists predicted a second cut could come as early as next month.

"Our initial reading is the RBA could well follow up today's move in March and it therefore does raise the possibility… of a cash rate below two percent this year," Australia and New Zealand Banking Group Chief Economist Warren Hogan said, according to the Herald.

There are fears the rate cut could increase the risk of a housing bubble, according to Commonwealth Securities Chief Economist Craig James.

"While global deflationary forces support the case for an easing of domestic monetary conditions, the risk is that another rate cut will lead to unsustainable strength in domestic home prices and contribute to inflationary risks," he said, quoted by Nine News TV.

The Australian newspaper said the cut cleared the way for the cheapest home loans in more than 40 years, a weaker Australian dollar and further house price increases.

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