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The Reserve Bank of Australia (RBA) announced Tuesday that it decided to cut the official interest rate by 50 basis points after its May board meeting.

The RBA board on Tuesday cut the cash rate to 3.75%, its lowest level since December 2009.

In a statement released Tuesday, RBA Governor Glenn Stevens said a lower inflation outlook suggested it was appropriate to cut the cash rate to help stimulate the economy.

“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated,” Mr. Stevens said in the statement.

“In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for 4 yrs.”

Mr. Stevens said the size of the cut was judged to be necessary in order to deliver the appropriate level of borrowing rates.

He also said the RBA still had plenty of room to cut rates further in the coming months if necessary.

The Australian dollar recovered some of the ground lost after this week’s official interest rate cut as investors shifted their focus to recent positive data from the US and China.

At the local close, the Australian dollar was trading at 103.34 US cents, up from 103.24 cents on Tuesday.

The Australian dollar dropped almost one US cent on Tuesday after the Reserve Bank of Australia (RBA) surprised the market by cutting the cash rate 50 basis points to 3.75 per cent, its lowest level in more than two years. Economists had been expecting a 25 basis point cut.\

Data released in the US overnight showed the country’s manufacturing sector grew for the second straight month in April.

Official Chinese data, released on Tuesday, showed that country’s manufacturing sector was at its strongest in 13 months.

Banks were lower after ANZ said income was heavily impacted by a 13 basis point fall in margins in its Australian operations, although it said first-half profit rose 5 per cent to a record high as strength in its growing international operations outweighed shrinking margins at home.

National Australia Bank eased 11 cents, or 0.4 per cent, to $25.10, while Commonwealth Bank was 17 cents lower at $52.68, Westpac retreated 14 cents to $22.69, and ANZ was off 19 cents, or 0.8 per cent, at $23.80.

NAB was this afternoon the first of the big four to cut its variable home loan rates but by less than the RBA cut, dropping its variable mortgage rate by 0.32 percentage points. The other majors are still on the sidelines.

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Paul A. Ebeling, Jnr.

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.

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