Australian central bank cuts interest rates to new low of 2.5%

SYDNEY (AFP) - Australia's central bank cut interest rates to a new record low of 2.5 per cent on Tuesday, underscoring fears of a major economic slowdown shaping up as a key election battleground.

The Reserve Bank of Australia shaved 25 basis points off the official cash rate to lows not seen since the central bank's 1959 establishment, just weeks ahead of the September 7 national polls.

RBA Governor Glenn Stevens cited recent muted inflation and retail sales data in unveiling the cut, which follows a grim pre-election budget update from the ruling Labor party last week.

"The economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment," Mr Stevens said.

The peak in Australia's decade-long Asia-led mining investment boom and slowdown in key market China saw Labor scale back its growth forecasts for 2013/14 to 2.5 per cent and bump up unemployment to 6.25 per cent last week, compared with 2.75 per cent and 5.75 per cent seen in the May budget.

Prime Minister Kevin Rudd, who is seeking a third term for Labor, warned A$33.3 billion (S$37.8 billion) had been slashed from the government's bottom line for the next four years due to the mining headwinds.

Both Mr Rudd and conservative opponent Tony Abbott have put economic management at the heart of their campaigns as Australia faces a major transition to non-mining drivers of growth.

Tuesday's decision is a mixed bag for Labor. While it underscores fears of an economic slowdown seized on by the conservatives as evidence of mismanagement, it also means an easing in cost-of-living pressures for key mortgage-belt voters.

The Australian dollar edged up slightly on the decision, with some investors expecting a more drastic 50-basis-point cut, to 89.55 US cents from 89.23 cents immediately prior.