The Reserve Bank has cut its official interest rate by 0.25 percentage points to a new record low of 1.25 per cent.

Key points: RBA cuts rates to support jobs growth in the face of rising unemployment

RBA cuts rates to support jobs growth in the face of rising unemployment ANZ is the first major bank to move, but only cuts variable mortgage rates by 18 basis points, holding back 30pc of the cut

ANZ is the first major bank to move, but only cuts variable mortgage rates by 18 basis points, holding back 30pc of the cut RBA warns low wage growth and falling house prices are the main uncertainties dragging down the domestic economy

While it is the first change in the RBA's policy setting since August 2016, it was a widely expected result.

The RBA governor Philip Lowe effectively flagged a rate cut in a speech last month.

The futures market had priced in a 100 per cent likelihood of a cut at the June meeting, with another cut expected by October.

All 43 economists surveyed by Refinitiv had also pencilled in a rate cut this month, while 80 per cent of them also expect a follow-up move in August.

The RBA has been under mounting pressure to stimulate a clearly faltering domestic economy, with retail sales figures out this morning showing consumers had cut back their spending.

While it had been loathe to cut rates in previous months for fear of further ratcheting up risky household debt, the bank felt it had to move given inflation has been marooned under its 2-to-3 per cent target band for the best part of three years and unemployment is starting rise.

'ANZ has let down its customers'

ANZ was the first major lender to move, cutting its variable interest rate loan by 0.18 percentage points 10 minutes after the RBA published its decision.

"In making this decision we have weighed up a number of factors, such as business performance, market conditions and the impact on our customers, including our depositors," ANZ's head of Australian retail and commercial banking Mark Hand said.

However, the decision to pass on just 70 per cent of the cut may not go down well with Treasurer Josh Frydenberg, who urged the banks to pass on the benefits of the cut.

"I think the ANZ has let down its customers. This is deeply disappointing from the ANZ," Mr Frydenberg said after the RBA decision and ANZ's response.

"This rate cut will be welcome news for Australian households and businesses and it will mean lower mortgage costs and lower interest payments."

"It is the Government's expectation, indeed it is the public's expectation, that banks should pass on, in full, to consumers, the benefits of reduced funding costs as a result of the Reserve Bank's decision."

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 45 seconds 45 s Treasurer Josh Frydenberg said ANZ's decision not to pass on the full rate cut was "deeply disappointing".

The RBA also noted that bank funding costs have fully reversed the increases that took place last year.

The Commonwealth Bank has announced that it will pass on the rate cut in full to all of its standard variable home loans.

National Australia Bank has followed suit and also announced that it will cut its standard variable rate home loans by 25 basis points.

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Westpac has tried to tread a middle ground by passing on only 20 basis points in rate cuts for most variable home loans, but 35 basis points for interest-only property investors.

The bank is also offering a 3.49 per cent five-year fixed rate for new first home buyer customers.

Some smaller lenders have also announced that they will pass on the rate cut in full, including Athena, RACQ and Reduce Home Loans.

RateCity said the lowest ongoing variable rate now stands at just 3.19 per cent.

Unemployment remains key

"The board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target," RBA governor Philip Lowe said in the regular post-meeting statement.

"The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices.

"[Tuesday's] decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target."

While not committing to another move, Dr Lowe's statement will do little to change perceptions the RBA has not finished lowering rates yet.

"The board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time," Dr Lowe concluded.

The Reserve Bank governor was speaking on Tuesday night in Sydney, where also took questions about the bank's first move in nearly three years and the likely future direction of monetary policy.

RBA glass still 'half-full'

RBC's Su-Lin Ong said, despite the RBA's still largely optimistic outlook, it is highly likely it will have to cut deeper.

"A further weakening in the labour market and core inflation that fails to lift will likely trigger further easing. To our mind, both pre-requisites are likely to be met in the coming months," Ms Ong said.

"Despite this, today's statement was balanced and erred somewhat glass half-full."

Ms Ong added the extent to which the major banks pass on the full cut to deliver maximum policy traction will be a key determinant for RBA decisions in coming months.