The Reserve Bank of Australia has cut the cash rate by 50 basis points to 3.75 per cent at its May board meeting.
It is the largest cut to the cash rate since a 100 basis point reduction in February 2009, and the first time the central bank has lowered the cash rate since it cut it by 25 basis points at its December board meeting.
RBA governor Glenn Stevens said economic conditions had been weaker than expected, and a 50 basis point cut was needed to deliver appropriate borrowing rates.
"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 a statement accompanying the decision.
"In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years."
The Australian dollar fell more than half a US cent after the announcement.
The local currency was trading at 104.09 US cents at 1429 AEST just before the decision was announced, and fell to 103.50 US cents by 1432 AEST.
The Australian dollar finished yesterday's local session at 104.58 US cents.
Commonwealth Bank chief economist Michael Blythe said the 50 basis point cut would lift consumer confidence.
"I think it has provided a circuit breaker for the negative feedback loop of consumer confidence that has been coming through," he said.
He said the decision to cut by more than the standard 25 basis points would ensure lower borrowing rates for consumers, even if commercial banks didn't pass on the full rate cut.
"It looks like a little bit like they are getting it all over in one hit and guaranteeing that, whatever banks may do, you still get a net easing in conditions."
He said the RBA still had plenty of room to cut rates further in the coming months if necessary.
The property sector has welcomed the cut, saying it will provide a welcome boost to consumer confidence and was good news for potential homebuyers.
ABN Group managing director Dale Alcock warned, however, the decision relied on the big four banks passing on the rate cut in full to borrowers.
“It would be disastrous if the banks followed the lead of ANZ bank which lifted interest rates for its variable home loan three weeks ago,” Mr Alcock said.
“I think the community is now expecting the banks to pass on the entire rate cut as soon as possible.”
The Housing Industry Association also lauded the decision as a decisive move, and put pressure on the RBA for further cuts later in the year.
“Following this appropriate step taken by the central bank today, a further interest rate needs to follow in June,” HIA chief economist Harley Dale said.
Dr Dale said anything less than a full pass-on of the cut by the big four banks would dilute the effectiveness of monetary policy, and damage confidence.
