Sydney - The Reserve Bank of Australia on Tuesday cut interest rates by 1 per cent to 6 per cent in response to a slew of figures showing the former speedy economy being sucked into the global slow down.

It was the RBA's second monthly cut in the rate it charges banks for borrowing, a reversal of a trend that had seen 12 consecutive rate rises since May 2002.

The further easing of monetary policy came despite inflation being above the RBA's 3-per-cent target. The central bank now sees a recession as more of a threat than inflation.

The cut was twice the size that most analysts had predicted and shows the government is deeply fearful of the economy careening into recession.

The cut in the cash rate will put further downward pressure on the Australian dollar, which has slipped in value against the US dollar by almost a quarter since its record high of 98 cents in July.

Skittish investors have deserted the local currency and sought the safety of the Japanese yen and other big-economy countries.

The Australian dollar is currently trading at 72 US cents.

The banks are unlikely to pass on the full rate cut because their costs of borrowing have risen in line with the international credit crunch.

The government has warned hard-pressed mortgage holders not to hope for the whole 100 basis points.

"When conditions normalize," Treasurer Wayne Swan said, "we also expect banks to pass on any further relief promptly."

Swan has already set aside billions of dollars for non-bank lenders who complain that they are unable to raise adequate finance on the international money markets because of the debt crisis. The big high street banks are better placed because they raise most of their money from depositors. (dpa)