The Reserve Bank of Australia has cut the cash rate to a new record low of 1.25 per cent in a widely anticipated attempt to stimulate the economy.
The central bank's first move in any direction since August 2016 followed another month of weak economic data, most notably an unexpected rise in the unemployment rate for April to 5.2 per cent.
RBA Governor Philip Lowe, who last month admitted a rate cut would be on the table ahead after the board opted not to cut amid the federal election campaign, said Tuesday's move should help speed a reduction in unemployment.
"Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy," Dr Lowe said in a statement.
"It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target."
Dr Lowe said there had been few inroads into the spare capacity in the labour market unemployment but increasing labour force participation, a high vacancy rate, reports of skills shortages and an expected pick-up in wages augured well.
"Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment," Dr Lowe said.
The Australian dollar rose against its US counterpart from 69.74 US cents immediately before the decision to as high as 69.93, before easing back to 69.80 by 1452 AEST.
APAC economist at Indeed.com Callum Pickering said low inflation had ultimately forced the RBA's hand.
"Low inflation does not occur by accident ... It is a sign of deep underlying concerns across the Australian economy," Mr Pickering said.
"(It hints at) a lack of domestic demand, concerns over the capacity of households to spend and invest, particularly with falling property prices"
BIS Oxford economist Sarah Hunter said the RBA is likely to cut again in August as it adjusts monetary policy in to hit inflation targets over time.
"And with global conditions deteriorating markedly and the US heading for a sharper than anticipated slowdown ... we think it's likely that (the RBA) will cut for a third time this year in November," Dr Hunter said.
Tuesday's rate cut means mortgage rates will likely come down, although Canstar figures show the banks have only passed on a full rate cut to customers half of the time since 2011.
In the past eight years the smallest rate cut passed on to borrowers at just 0.13 per cent was tied to the most recent RBA cut in August 2016.
ANZ was the first of the big four banks to reduce variable mortgage rates following Tuesday's cut, but it will not pass on the full amount.
The lender said it would reduce its variable rates for owner-occupier and investor loans by 0.18 percentage points from June 14.
NAB analysts said the chances of a further 25 basis point cut in July or August would be complicated by datasets potentially skewed by the federal election campaign in May.
"Anecdotal reports suggest weak retail spending immediately prior to the election, but a decent lift in home buyer enquiry and auction clearances in the weeks after the election," NAB said in a note.
"The RBA Board will also have to consider that income tax cuts for lower-paid workers which will begin to flow from July 1"
