The Reserve Bank of Australia (RBA) has cut the cash rate to 4.25 per cent from 4.5 per cent at its December board meeting.
It was the second consecutive month that that the RBA has cut the rate.
RBC economist Su-Lin Ong said the decision to cut rates reflected concerns about the impact of the European debt crisis on global growth.
"It's clear that what is driving these decisions in the global growth outlook," she said.
"We think that really, while the Australian economy is in reasonable shape, it's the threats to global growth and the potential spillover to Asia and Australia that is driving today's decision."
Ms Ong expected further rate cuts to follow the decision early next year.
"The easing bias is very clear. We think they will do more next year and we have another 50 points of easing in our forecasts."
The RBA board next meets in February. Ms Ong said the 25 basis point cut would deliver a boost to struggling sectors including retail and housing.
"It will probably give a lift to confidence.
"Rate cuts are generally welcome by the interest rate sensitive sectors such as housing, consumption and retail."
If banks pass on the cut in full, homeowners with an average-size mortgage of $300,000 should expect to pay around $50 a month less on their loan repayments.
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