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The Reserve Bank has put fears of an overheated housing market to one side, slashing the cash rate to 2 per cent just one week before the federal budget and citing low investor confidence and a low inflation outlook as factors.
The decision - which sets the official cash rate at an all-time low - is designed to kickstart flagging business investment but also risks reinforcing concerns about the weak state of the economy.
The move actually sent the dollar higher (contrary to the bank's plan) as markets assessed it would likely be the last downward move.
But Treasurer Joe Hockey was only seeing the upside, declaring the $60-per-month saving on a $400,000 mortgage was "fertiliser" for an economy showing green shoots, as he called on households and business to use debt to fund new opportunities.
"Now is the time to borrow and invest ... now is the time to have a go," a clearly upbeat Mr Hockey said, branding the prospect of cheaper mortgage rates "good news for families and good news for small business".
In a sign his deficit reduction plan has itself been shelved, Mr Hockey said next week's budget would show the twin arms of monetary and fiscal policy working together in a budget that would be "measured, fair, and responsible" and designed to promote "jobs, growth, and opportunity".
While few details of the budget have been released, the government is poised to announce a new childcare assistance package and small business tax cuts as part of the plan to promote growth and rebuild its own political stocks. A deeply unpopular policy announced last year to cut pension indexation from 2017 is to be shelved in favour of a tighter assets test on wealthier part-pension recipients.
In a further sign of a growth-bias in the 2015-16 budget, Mr Hockey declined to describe last year's effort as "measured, fair, and responsible," calling it instead "an important budget for its time".
Business greeted the Reserve Bank move with a degree of caution, with the Australian Chamber of Commerce and Industry's John Osborn predicting it would provide businesses with "a little more confidence to grow" while requiring more action from government itself on budget repair.
"Monetary policy can only take us so far," he said.
The Australian Industry Group noted that the cut reflected "the fragile state of our economy".
Mr Hockey said while the interest rate cut was good news for homebuyers, it would however mean greater hardship for self-funded retirees and, marking out a clear political difference with Labor, promised the budget would not include increased taxes on superannuation for the wealthy.
"I want to emphasise it's going to be very hard for people who retire and rely on their savings being in the bank and that's one of the reason why the government had decided that it's unacceptable to have any increase in taxation on superannuation in the upcoming budget," he said.
Economists believe the Reserve Bank is nearing and indeed may have reached the end of its rate-cutting phase.
NAB chief economist Ivan Colhoun says there is now little prospect of another rate cut in the near-term "barring a significant unexpected change in the global economy".
St George Bank chief economist Hans Kunnen told clients the RBA's "easing bias" has now "been put on the back burner".
Economists said the RBA's decision would push mortgage rates down to levels not seen since the mid-1950s.
ANZ was the first of the big four banks to flag its intentions in response to the Reserve Bank's cut, saying it would lower the rate on its standard variable home loan by 0.25 percentage points this Friday. Commonwealth Bank only passed on 20 basis points to borrowers.
The market is still pricing in one more rate cut in the RBA's interest rate cycle, but it expects that to happen in the first quarter of next year.
The rate cut reflects the central bank's ongoing concerns over low business confidence and suggests it regards the risk of an overheating property market in Sydney as less of a danger to the broader economy than the reluctance of business to invest and create new wealth.
RBA governor Glenn Stevens said the "key drag" on demand over the coming year would likely be "weakness in business capital expenditure in both the mining and non-mining sectors," noting that government spending was "scheduled to be subdued".
But he also said there seemed to be "improved trends in household demand over the past six months and stronger growth in employment."
His positive assessment of the economy caught currency traders by surprise, so despite the Australian dollar falling more than US0.7 cents to US77.88 cents immediately after the rate announcement, it quickly shot higher, to US79.05 cents.
The dramatic cut may also be seen as a pre-budget shot across the bow of the Abbott government, which has spent much of its time warning of a budget emergency and has so far shown a marked reluctance to use fiscal policy to stimulate activity and build confidence.
The cut comes despite Mr Stevens' previous warnings that monetary policy is becoming less effective in stimulating demand because the problem is not so much a lack of money in the economy, as a lack of confidence.
"The economy is therefore likely to be operating with a degree of spare capacity for some time yet," he said on Tuesday.
But while Mr Hockey is flagging stimulus, Mr Osborn said his organisation was worried the government had dropped the ball on cutting spending.
"Cutting interest rates to a historic low reinforces the need to reduce public spending, tax and regulation so businesses have more room to invest and create jobs ... interest rate cuts must be coupled with budget repair before this will turn around," he said.
