The Reserve Bank of Australia (RBA) has cut the cash interest rate by 50 basis points to 3.75% in a decision that went further than the 25 basis points tipped by economists.
The big cut came amid calls from politicians and business people affected by slow consumer spending to cut the rate.
The move came after a low overall inflation rate was reported by the ABS last week, but still showed basic living expenses like rent, energy and school fees are rising above the target rate.
The move comes in the wake of low consumer confidence, which fell in April according to the Westpac/Melbourne Institute index of consumer sentiment.
The drop by the RBA does not guarantee rate cuts to people with mortgages because banks say they are facing higher wholesale costs from overseas due to the debt crisis in Europe and the foreign view that Australian housing prices are overvalued — increasing perceived risk to wholesale lenders.
The cut will mean lower deposit rates for savers.
On May 4 at 11.30am AEST the RBA will release its Statement on Monetary Policy to explain the move.