The Reserve Bank on Tuesday voted to cut the cash rate for the first time since early 2009, and forecast that Australia's terms of trade have peaked.
The RBA board decided to shave 25 basis points from the cash rate, leaving it at 4.5% as of Wednesday.
The Bank's governor for monetary policy decision, Glenn Stevens, said while fears of a major global economic downturn have yet to be borne out so far, recent financial data shows a moderation in the pace of global growth.
He said that Australia's terms of trade are set to decline in the near term - due in part to cautious household spending behaviour and the high exchange rate - although they remain very high.
Underlying inflation is also showing signs of slowing, and with unemployment growing slightly in recent months, the likelihood of a surge in labour costs is looking more remote.
As a result, the Bank considers inflation on track to meet the 2-3% target for 2012 and 2013, minus any impact of the carbon pricing scheme.
“With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth,” Stevens said.