Australia's central bank on Tuesday cut its benchmark interest rate for the first time in nearly seven years as it responded to indications inflationary pressures and economic growth may both be easing.

After cutting the official rate from 7.25 to 7 per cent, the Reserve Bank of Australia said that tight financial conditions together with higher fuel costs and lower asset values had "exerted the needed restraint on demand".

However, it also acknowledged there were "opposing forces" at work which created uncertainty over the outlook for demand and inflation.

A series of indicators in recent days have suggested the Australian economy is in much better health than expected. Until late last month, many economists had predicted a further four rate cuts within the next seven months.

The resources boom has led to a sharp rise in exports and a significant improvement in Australia's current account balance, with the quarterly deficit dropping from A$20bn at the end of March to A$12.8bn at the end of June.

The Reserve Bank said yesterday that it did not expect the annual inflation rate to fall below 3 per cent until 2010. The central bank has a target inflation band of 2 to 3 per cent. Australia's annual rate of inflation rose to 4.5 per cent in the June quarter, up from 4.2 per cent in the March period.

Continued at FT.com