The Reserve Bank has stunned financial markets by announcing a full-percentage point cut - double what analysts had tipped - saying financial markets had taken a "significant turn for the worse".
Australia's official lending rate was lowered by the biggest amount in one hit since May 1992.
If Westpac and Commonwealth Bank are any guide, though, the major lenders aren't likely to pass on the full 100 basis-point cut to their customers, blaming their own rising borrowing costs on overseas money markets.
In response to the RBA cut, both Westpac and CBA said it would lower its variable home loan rate by 80 basis points, or 0.8 of a percentage point, from Monday, while Aussie Home Loans plans to cuts its lending rate by as much as 75 basis points. National Bank and ANZ Bank said they were reviewing their rates.
The central bank cut its key cash rate from 7pc to 6pc, compared with the 50 basis-point cut expected by markets.
The move follows last month's quarter-percentage point cut by the RBA, which lowered the lending rate from a 12-year high.
"This is perhaps the sharpest about-face in Australian monetary policy history," said Matt Robinson, economist at Moody's Economy.com.
"It's such a change from where the central bank was when it raised interest rates in February and March."
The RBA said the Australian economy now faced a sharp slowdown, while inflation is also likely to subside.
"The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected," Reserve Bank governor Glenn Stevens said in an accompanying statement.
"Should that occur, inflation would most likely fall faster than earlier forecast."
Before the RBA announcement, Macquarie interest-rate strategist, Rory Robertson, predicted that "the RBA's cash rate is on the way from 7pc to 6pc to 5pc and towards 4pc".
"The RBA seems likely to cut its cash rate all the way back to 4.25pc within two years," he said.
One reason for the steep cuts to come is that clogged credit markets overseas mean that only part of the RBA's rate reductions is likely to be passed on by commercial banks, Mr Robertson said.
Stocks soared after the shock RBA rate cut, helping the market rise for the first day in four.
The benchmark S&P/ASX200 share index rallied about 3pc on the news, before closing 1.7pc, or 78.3 points, higher for the day at 4618.7.
Earlier, it had followed the global market rout, to be 3.3pc lower at one point.
Wall Street and most European markets dived overnight on growing concerns of a sudden stalling in the global economy.
The Australian dollar, which has plunged more than 10 US cents in the past couple of trading days, initially lurched lower after the shock RBA cut, falling almost 2 US cents.
It then recovered slightly to trade recently at US72.36c after jumping to as high has US73.17c in afternoon trading.
The spike was greater against the yen, with the dolllar surging to 75.56, up from an overnight low of 70.32 and recently traded at 74.36 yen.
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