The Reserve Bank of Australia (RBA) has cut the cash rate by a quarter of a percentage point to three per cent, its lowest level since the global financial crisis.
The previous interest rate move was a quarter of a percentage point reduction in October, and the central bank has cut the cash rate by 1.5 percentage points since November 2011.
In a statement accompanying the decision, RBA governor Glenn Stevens said global growth is expected to be below average because of the European debt crisis and the looming US fiscal cliff.
He added growth in Asia has been dampened by the slower rate of Chinese economic growth.
"Key commodity prices for Australia remain significantly lower than earlier in the year, though trends have been more mixed over the past few months," Mr Stevens said.
"The terms of trade have declined by about 15 per cent since the peak, to a level that is still historically high."
Three per cent is the lowest the RBA's cash rate has been since early October 2009, during the global financial crisis.
Mr Stevens said most indicators suggest that the Australian economy is growing around trend, led by mining investment.
"Looking ahead, recent data confirm that the peak in resource investment is approaching.
As it does, there will be more scope for some other areas of demand to strengthen," he said.
The market was widely expecting an interest rate cut at the December board meeting, especially after the surprise decision to keep the rate on hold at last month's meeting.
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