The Reserve Bank of Australia (RBA) cut its interest rate to 2.00% from 2.25% on Tuesday. This decision was expected by analysts. It was the second interest rate cut this year.

"At today's meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand," the RBA Governor Glenn Stevens said.

The central bank said that falling commodity prices, weak business investment and subdued government spending were dragging on the Australian economy. But the RBA added that there is an improved trend in household demand.

The RBA noted that the further interest rate cut is "both likely and necessary" despite the significant decline of the Australian dollar over the past year as the key commodity prices decreased.