The Reserve Bank of Australia has cut the cash interest rate after seeing scope for a "modest" adjustment in monetary policy.
The central bank on Tuesday cut the cash rate by 25 basis points to 3%, its lowest level in 49 years.
The bank said there had already been a significant change in monetary and fiscal policy after a series of rate cuts since September and the announcement of federal government fiscal stimulus initiatives.
It noted market and mortgage interest rates are at very low levels and business loan rates are below recent averages, reducing debt servicing burdens.
"Nonetheless, the board judged that there was scope for a further modest adjustment to the cash rate," Governor Glenn Stevens said. "The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead."
The bank's decision leaves the cash rate at its lowest level since March 1960 when the monthly average rate was 2.99%.
Mr Steven said the Australian economy was contracting, although by less than the economies of its trading partners.
The bank expected further weakness in the jobs market, which was likely to keep a lid on pay rises and help push down inflation.