THE Reserve Bank of Australia (RBA) has cut the cash rate by 100 basis points to its lowest level in six and a half years.

The cash rate was lowered to 4.25 per cent, from 5.25 per cent, for the first time since May 7, 2002.

It is the fourth month in a row the RBA has cut interest rates in a bid to head off the impact of slower world economic growth on an already soft Australian economy.

The reduction was more than had been expected.

Most financial market economists were looking for a 75 basis point reduction.

Debt futures markets were more optimistic and had factored in a 100 basis point cut.

RBA governor Glenn Stevens said the bank's board had judged a further significant fall in the cash rate was warranted this month to create a more expansionary setting for the economy.

"As a result of today's decision, the cash rate will be at its previous cyclical low point," he said in a statement.

"Given trends in money market yields, most lending rates should fall significantly and will also reach below-average levels."

Commonwealth Bank of Australia Ltd (CBA) and Westpac Banking Corp and National Australia Bank Ltd moved quickly to cut their variable home loan rates within minutes of the RBA move.

CBA and NAB each lowered their standard variable rates by 100 basis points.

Westpac cut its rate by 80 basis points.