In an effort to reignite growth in the sagging economy, the Reserve Bank of Australia has made a cut on its interest rates, with the dollar diving on the recent decision.

As evidence of weaker demand in the Australian economy continues with weaker global conditions hitting exports and restricted wage growth keeping prices in check, the RBA has cut its growth and inflation forecasts for the next 18 months, according to its Statement on Monetary Policy released recently.

In its quarterly Monetary Policy Statement, the RBA announced that its official cash rate was slashed by 50 basis points to 3.75 per cent, which is twice the amount expected by economists.

The first by the RBA this year, the rent surprise reduction has set a record as the biggest since February 2009 and reflects the bank’s concern that the economy needs an extra helping hand.

There is also a reduction on RBA’s forecast for gross domestic product (GDP) growth in the year to June to 2.75 per cent, down from its forecast of 3.5 per cent delivered just three months ago.

The RBA is also expecting an underlying inflation to be about 2.0 per cent for the year to the end of June. This 0.25 percentage points lower than it forecast three months ago.

In its statement on Monetary Policy today, the much weaker than expected exports during the 2011/12 financial year was attributed in part by RBA to slower growth in the global economy.

The slower-than-expected recovery in coal exports, due to infrastructure issues, had also weighed on growth.

The recent cut had also left the RBA’s cash rate at its lowest since December 2009 when the economy was recovering from the initial impact of the global financial crisis.

The cash rates were already raised by RBA seven times from October 2009 prior to changing course last November with the first of two cuts to round out 2011.