The Reserve Bank of Australia (RBA) 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 three per cent, its lowest level in 49 years.

The RBA said there had already been a major change in both monetary and fiscal policy, following 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 in a statement.

“The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.”

The decision by the RBA, following its board meeting in Brisbane on Tuesday, leaves the cash rate at its lowest level since March 1960, when the monthly average rate was 2.99 per cent.

Mr Steven said the Australian economy was contracting, although by less than the economies of the nation’s trading partners.

“Capacity utilisation has fallen from its peak, and will decline further over the rest of the year,” he added.

The RBA expected further weakness in the jobs market, which was likely to keep a lid on pay rises and help push down inflation.

“With demand for labour weakening, growth in labour costs will probably also fall,” Mr Stevens said.

“Hence, inflation over the medium term is likely to be lower than it has been over the past two years.”

Mr Stevens also said while demand for credit in Australia was weak overall, there had been a pick-up in the owner-occupied housing sector.

The RBA board also noted the contraction in the global economy continued in the first few months of this year and that there had been downward revisions to the growth outlook.

“Considerable economic policy stimulus is in train in most countries, the full effects of which are not yet discernible, but which should help contain the downturn over the rest of the year,” Mr Stevens said.

“There are tentative signs of stabilisation in several countries, including China, though it is too early yet to judge how durable these will prove to be.”

Mr Stevens said conditions in global financial markets had continued to improve, helped by progress towards a resolution of banking system difficulties in the United States and other major countries.

But “sentiment remains fragile” and the contraction in economic activity was affecting the asset quality of financial institutions.

AAP