The Reserve Bank of Australia has cuts its cash rate to 4.25 per cent from 4.5 per cent, citing slowing growth in China, Europe's financial crisis and a benign inflation outlet.
It is the RBA's second cut in a month - it cut the rate from 4.75 per cent onNovember 4 after holding steady for a year.
Ahead of the announcement, economists described the decision as "line-ball" although wholesale financial markets had priced in a cut.
"Overall, the board concluded, on the basis of all the available information, that the inflation outlook afforded scope for a modest reduction in the cash rate," RBA governor Glenn Stevens said in a statement.
"The board will continue to set policy as needed to foster sustainable growth and low inflation over time," he said.
Stevens said global economic growth has moderated this year and China's growth has been slowing as policymakers there intended.
"Trade in Asia is now, however, seeing some effects of a significant slowing in economic activity in Europe," he said.
The European crisis is likely to weigh on economy activity for some time and financing conditions have become much more difficult.
"This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased."
Commodity prices have reflected this by declining further over recent months, taking the pressure off inflation.
The Australian economic data suggests output growth has been close to trend with demand growth stronger than that. The terms of trade have peaked and will decline in the near term but still remain very high.
But while the resources sector and related services sectors are strong, the high exchange rate and changed behaviour by households "have had a noticeable dampening effect."
