The move is the first since March when the Reserve Bank of Australia board made two cuts of a quarter of a percentage point each two weeks apart.
The Reserve Bank also announced it would buy 100 billion Australian ($70 billion) of government bonds of maturities of around five-to-10 years over the next six months.
The bank is prepared to buy bonds in whatever quantity was required to achieve a 3-year yield target of 0.1%, Reserve Bank governor Philip Lowe said in a statement
“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs,” Lowe said.
Recent economic data have been better than expected and the near-term outlook was better than it was three months ago, he said.
“Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus,” he added.
The board said the global economy had been recovering from the initial virus outbreaks, with the recovery most advanced in China.
Output in most countries remains well short of pre-pandemic levels and recent virus outbreaks pose a downside risk to the outlook, particularly in Europe, Lowe said.
The Australian economy contracted during the first half of the calendar year, although Lowe said official data will reveal growth in the September quarter.
The bank expects the economy will grow by 6% in the current fiscal year through June 2021 and 4% in the following year.
It also has forecast that Australia's jobless rate will peak at less than 8%, down from a previous estimate of 10%.
Inflation is expected to be 1% in 2021 and 1.5% in 2022.
Lowe said the bank would not lift its benchmark cash interest rate until inflation reached its target band of between 2% and 3%.