The Reserve Bank has slashed the official interest rate to a fresh record low to help battle faltering inflation.
The RBA cut the cash rate by 25 basis points to 1.75 per cent at its May board meeting on Tuesday, after more than 12 months on the sidelines.
The unexpected 0.2 per cent drop in March quarter consumer prices, reported last week, led the RBA to revise its inflation forecast which triggered the rate cut.
"Inflation has been quite low for some time and recent data were unexpectedly low," RBA governor Glenn Stevens said in a statement.
"While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast."
The RBA governor noted that uncertainty about the global outlook and diverging central bank policies continued to be a concern as well.
Mr Stevens also said while economic conditions had improved in some advanced economies recently, conditions had become more difficult in emerging economies, particularly in China, Australia's biggest trading partner.
"China's growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook," he said.
However, Mr Stevens said house prices were continuing to abate, so the risk of low rates to the housing sector were less than a year ago.
"The Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting," he said.
The National Australia Bank was the first of the big banks to respond, passing on the full RBA cut to bring its variable rate to 5.35 per cent within minutes of the central bank's announcement.
