The Reserve Bank (RBA) cut its key interest rate more than expected as it attempts to prevent Australia's economy stalling.
The central bank lopped three-quarters of a percentage point - or 75 basis points - off its key cash rate, reducing it to 5.25pc, the lowest level since December 2003.
"There's no doubt there has been further deterioration of the global credit markets," said Su-Lin Ong of RBC Capital Markets. "The increasingly gloomy activity data as well is a key reason they're continuing to front-load rates."
The move, announced after today's monthly board meeting by the RBA, exceeded economists' predictions of a 50 basis-points cut, and marks three months in a row of reductions.
''Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence,'' RBA Governor Glenn Stevens said in a statement.
''On balance, it appears likely that spending and activity will be weaker than earlier expected.''
For a typical 25-year, $250,000 home loan, today's cut if passed on in full by lenders will save the borrower $112.63 a month in payments or some $33,791 over the life of the loan.
The Commonwealth Bank was among the first banks to respond, announcing it would pass on 58 basis points of the cuts to customers.
The Australian dollar lost about a third of one US cent after the larger-than-tipped size of the cut, trading recently at 66.84 US cents.
Stocks pared their losses for the day on the news, jumping about 30 points, or about 0.6pc, with the main S&P/ASX200 share index at 4,201 points.
Today's cut brings the RBA's cuts to 2 percentage points since the central bank reversed course in September, retreating from a 12-year high rate of 7.25pc.
World financial markets have remained turbulent over the past month,'' Mr Stevens said in the statement.
''Global equity prices have been volatile and fell further in net terms, and there have been significant exchange rate movements, including a sharp depreciation of the Australian dollar.
"A number of governments have announced measures to strengthen their financial systems, which should help to stabilise conditions over time,'' the RBA said.
Lower lending costs help spur the economy by encouraging more individuals and businesses to purchase houses or make other investments, stoking demand that in turn prompts more orders.
Almost all the latest economic figures point to a sharp slowdown in demand as the effects of the global financial crisis spread to Australia. Falling commodity prices are already dimming the outlook for the mining and export sectors.
Retail sales shrank 1.1pc last month from September, the largest drop since April 2005, as consumers start to pull back on spending.
House prices, another measure of the economy's health, fell 1.8pc in the September quarter, the sharpest slowdown since the 1970s, according to some reports.
Job ads, one indication of future employment opportunities, also slumped last month and are now about 10% lower than this time last year.
czappone@fairfax.com.a u
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