Historic Low of 1.75 per cent
It is the first change in interest rates since May last year, when rates were cut 25 basis points to 2 per cent.
Before the decision, the market had priced in roughly a 50 per cent chance of a cut after last week's surprisingly weak inflation figures.
Key to the decision was the reading of core inflation — the RBA's preferred measure — at 1.5 per cent, the lowest reading on record and well below the target band of 2 to 3 per cent.
If the 25 basis point cut was fully passed on to home loans by the banks, it would equate to a $43-a-month saving on a typical 25-year $300,000 mortgage.
In a statement accompanying the decision, RBA governor Glenn Stevens pointed to the unexpectedly weak inflation data as the reason behind the move.
The move had an immediate impact on commercial banks, with NAB passing on the full 25-basis-point cut, taking its standard variable home loan from 5.60 per cent to 5.35 per cent.
Investment loans will drop from 5.75 per cent to 5.50 per cent, while business loans will also be cut by 25 basis points.
NAB personal banking group executive Gavin Slater said in making the decision to change interest rates, the bank considered a range of factors.
"The circumstances of each decision will always vary, and we must take into account factors such as competition, regulatory capital requirements, and funding costs," Mr Slater said.
Reported on ABC website 3.5.16