SYDNEY, May 20 (Reuters) - Australia's central bank on

Tuesday cut its main cash rate by 25 basis points to a two-year

low of 3.85% citing a darker global outlook and cooling

inflation at home, though it also remained cautious on further

easing.

The Australian dollar fell 0.4% to $0.6430 and

three-year bond futures rose 5 ticks to 96.40. Swaps

imply a total easing of 57 basis points by the end of the year.

Wrapping up a two-day policy meeting, the Reserve Bank of

Australia said upside risks to inflation had diminished while

international developments were expected to weigh on the

domestic economy.

Markets had been fully priced for an easing given a slowdown

in inflation at home and a darker outlook globally following

last month's announcement of hefty U.S. tariffs on imports.

"Inflation is in the target band and upside risks appear to

have diminished as international developments are expected to

weigh on the economy," the board said in a statement.

"The board assesses that this move will make monetary policy

somewhat less restrictive. It nevertheless remains cautious

about the outlook."

Headline consumer price inflation held at 2.4% in the first

quarter and a key trimmed mean measure of core inflation slowed

to 2.9%, taking it back into the RBA's target band of 2% to 3%

for the first time since late 2021.

"The bank continues to strike a cautious tone about further

rate cuts, noting that weak productivity growth and the tight

labour market continue to put upward pressure on labour costs,"

said Sean Langcake, head of macroeconomic forecasting for Oxford

Economics Australia.

Langcake said the cash rate is still "slightly

restrictive" and expects two more rate cuts in the second half

of the year.

Since the RBA last met in April, the global landscape has

changed drastically.

U.S. President Donald Trump's global trade war has roiled

financial markets and upended business plans. Trump has imposed

10% blanket import duties on the rest of the world, and after a

tariff showdown with China that threatened a global recession,

both agreed to slash sky-high duties on each other's goods for

90 days.

Australia is a major exporter of resources to China and

tariffs on the world's second-biggest economy could hinder

growth there and its demand for commodities such as iron ore.

At home, the flow of data has been mixed, with the

anticipated rebound in consumer spending disappointingly soft.

The labour market, however, remained surprisingly strong, with

the jobless rate staying low at 4.1% where it has roughly been

for over a year now.

Wages growth picked up in the first quarter, but that was

due to government pay rises and should not lead to a damaging

wage-price spiral.

In its quarterly Statement on Monetary Policy, released on

Tuesday, the RBA also said inflation would be lower and

unemployment higher due to the cascading effects of global trade

tensions, and that was even assuming interest rates were cut as

deeply as markets expected.

It warned that the drag from Trump's tariffs would lower

global growth and prove disinflationary in net terms for

Australia.