Australia's central bank slashed interest rates by a shock 50 basis points on Tuesday to 3.75 per cent due to weak economic conditions and easing inflation.
It is the largest cut since the Reserve Bank of Australia reduced rates by 100 basis points in February 2009 in the wake of the global financial crisis, and it caused a sharp drop in the Aussie dollar.
The local currency, which has been at historic highs for the past 18 months, slumped from 104.10 US cents to 103.45 US cents immediately after the announcement. Sydney stocks were up more than one per cent.
Bank chairman Glenn Stevens said the decision was "based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated".
"A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates," he said.
In particular, key inflation data showed that underlying inflation had declined again, and was a little over 2.0 per cent over the latest four quarters and would likely be lower than earlier forecast in the next few years.
The RBA last cut its rate in December, and Stevens said the board "judged it desirable that financial conditions now be easier than those which had prevailed" then.
He repeated his view that while growth in the global economy had slowed in late 2011, a deep downturn was not occurring.
"Market sentiment remains skittish, however, and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe's growth prospects, remain large," he said.
"Europe will remain a potential source of adverse shocks for some time yet."
Australia, dubbed the "Wonder from Down Under" after its mining-fuelled economy dodged recession during the global financial crisis, still has higher rates compared to other nations.
The US Federal Reserve is expected to keep interest rates near zero until late 2014, while Bank of England policymakers last month voted to keep rates at a record low 0.50 per cent, where they have stood since March 2009.
With the European economy tipping towards recession, the European Central Bank's policy-setting governing council voted last month to leave its benchmark interest rate unchanged at the historic low of 1.0 per cent.