The Reserve Bank (RBA) has lowered interest rates to 3 per cent, the same level as at the peak of the financial crisis.
The 25-basis-point rate cut means the official cash rate target is at its equal lowest level since the RBA started publishing its cash rate target in 1990.
A rate cut was expected by economists, with 20 out of 28 economists surveyed by Bloomberg forecasting the move, and financial markets having priced in more than a 90 per cent chance of a rate cut.
Some market participants must have been betting on a cut of 0.5 per cent, with the Australian dollar rising from 104.1 US cents around the time of the decision to 104.6 US cents shortly after, despite rates going down.
The Reserve Bank's governor Glenn Stevens again chose to highlight the strength of the local currency as a factor in the RBA's thinking.
"There are signs of easier [interest rate] conditions starting to have some of the expected effects, though the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook," he noted in his post-meeting statement.
"While the full effects of earlier measures are yet to be observed, the board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now." Federal Treasurer Wayne Swan welcomed the rate cut.
"Today's rate cut from the Reserve Bank is the early Christmas present that hard-working Aussies deserve," he said.
"We've now had the equivalent of seven rate cuts over the past year and of course that's been made possible by the Government's economic management, strong budget management and of course contained inflation." But Opposition treasury spokesman Joe Hockey said the Reserve Bank was acting to counter poor economic management by the Federal Government.
"The challenge is that the interest rates cuts are not coming because the Australian economy is doing well, it's because the Australian economy is facing tougher times," he said.
Cliff concerns In his comments, Mr Stevens also highlighted ongoing weakness in European economies, as well as concerns about the fiscal cliff in the US posing risks to that country's recovery, and ongoing uncertainty about the pace of Chinese economic growth.
However, it is a weaker-than-expected domestic economic outlook that appears to have triggered the latest rate reduction, including state and federal government budget cuts.
"Recent data confirm that the peak in resource investment is approaching," Mr Stevens observed.
"Available information suggests that the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued.
Public spending is forecast to be constrained." Citi senior economist Joshua Williamson says the governor's statement is almost identical to last month's, where the bank elected to leave rates on hold.
He says that sends a message that this month's rate cut was a precaution in case the US falls off its so-called fiscal cliff of tax increases and spending cuts at the end of this month.
"The RBA doesn't meet in January, so it's taking an unusual two month break before the next meeting," Mr Williamson observed.
"So cutting today may have also provided some insurance over that December-January period, which is going to be the crux period for those fiscal deliberations in the US." Mortgage rates The Reserve Bank is hoping that lower interest rates will help boost a nascent home building recovery, but without excessively stoking real estate prices.
The RBA expects inflation will remain within its 2-3 per cent target range over the next year or two, giving it the scope to cut rates now, but warned that productivity would have to improve and wage growth remain slow to allow rates to remain low.
The rate reduction will take just under $50 a month from repayments on a $300,000 25-year mortgage, if it is passed on in full by financial institutions.
Economists note that standard variable mortgage rates have not hit the lows seen during 2009, due to a large increase in the spread, or gap, between retail rates and the official cash rate.
Standard variable mortgage rates with the major banks averaged around 5.75 per cent when the cash rate was last at 3 per cent in 2009 according to RBA figures, but were 6.65 per cent last month, and would fall to 6.4 per cent if all financial institutions passed on this latest cut to the official cash rate.
However, that appears unlikely, with the Bankers' Association yesterday warning that banks were still facing higher funding costs and may not pass on all of any rate cut.
The Bank of Queensland has been the first large lender to respond to the decision, cutting its standard variable mortgage rate by 20 basis points to 6.51 per cent effective from December 21.
ING Direct has decided to pass on the full 25-basis-point rate cut, saying its "funding position has eased recently", but warning that the threat of higher funding costs has not disappeared.