The Reserve Bank of Australia (RBA) has cut its interest rate by 0.75 of a percentage point taking the official rate to 5.25% marking the third consecutive drop. This brings the rate down from 7% last month and down 2% over 3 months.

RBA governor Glenn Stevens said it appears likely that spending and activity in Australia will be weaker than earlier expected, but inflation appears to be easing.

"Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence. Capacity pressures are now easing and, given the outlook for more moderate growth in demand and activity, it is reasonable to expect that inflation in Australia will soon start to fall," he said.

Federal Treasurer Wayne Swan said: "I would expect banks to pass on any cut as quickly and as rapidly as they possibly can".

Opposition Leader Malcolm Turnbull agreed: "The banks should pass on the entirety of that cut, they are in a position to do so, in my view".

The Australian Bureau of Statistics (ABS) released figures showing that house prices fell an average of 1.8% in the September quarter.

Mr Swan says the rate cut is good news for Australian businesses and families and will help to stabilise the economy.

"What it means is that both the Reserve Bank and the Government are absolutely determined to strengthen our economy in the face of changing international conditions. All arms of policy - fiscal policy and monetary policy - are working in tandem in the face of the global financial crisis which is referred to extensively by the RBA today in their statements," he said.

The rate cut will reduce payments on $300,000 mortgages by around $150 a month.

Since the rate cut was announced Australian stocks have jumped.

The Australian dollar had fallen and was buying 66.7 US cents.

The Commonwealth announced it will not be passing on the full rate cut, but effective from Monday it will be cutting its variable home loan rate by 0.58%.