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UPDATE: 1.15PM Mortgage-holders are expected to receive further relief after the central bank cut interest rates to their lowest level since the global financial crisis three years ago.

The Reserve Bank of Australia cut the cash rate by 25 basis points to 3.50 per cent, its lowest level since November 2009, at its board meeting on Tuesday.

The RBA cited an uncertain global economy, modest domestic growth and a benign inflation outlook as the reasoning behind the cuts.

The cut followed a 50 basis point rate cut in May.

Wayne Swan says home borrowers will be “very angry” if the big commercial banks don’t pass on the latest central rate bank cut in full.

“The banks are very profitable, net interest margins are around the levels that they were prior to the global financial crisis,” Mr Swan said in Canberra.

“I think that their customers will not treat them kindly if they do not pass this through in full.

“I think their customers will be very angry.”

In a statement accompanying the rates decision today, RBA governor Glenn Stevens highlighted the risk posed by Europe’s sovereign debt crisis to the Australian economy.

“The board has noted previously that Europe would remain a potential source of adverse shocks,” he said.

“Europe’s economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks.”

Mr Stevens said Australia’s terms of trade had fallen over the past six months while commodity prices were lower and the local housing market remained subdued.

He said that, with inflation expected to remain near the bottom the RBA’s two to three per cent target range, the RBA had room to cut the cash rate.

“The Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.”

Macquarie senior economist Brian Redican said the RBA statement appeared to be mainly focused on conditions on world markets, with little mention of weakness in the domestic economy.

“It's quite a bland statement,” he said.

“They have mostly talked about offshore risks, but mentioning potentially solid Chinese growth, so that will be worth watching in the next few months.

“They haven't pointed to anything worrying in the domestic economy, so it appears that this is a precautionary rate cut designed to instil confidence in the economy when financial markets and the rest of the world are looking quite threatening.”

However, the central bank was still reticent to show a strong easing bias, Mr Redican said.

“What it suggests is that the Reserve Bank is not overreacting to the situation offshore, and the argument for going to 50 basis points just wasn't there,” he said.

Commonwealth Bank chief economist Michael Blythe said the decision to cut by 25 basis points, rather than the 50 points markets as expected, suggested the central bank was “keeping its powder dry” in case the European situation worsened.

“If something really does go wrong in Europe then you want the ability to move very aggressively, like we did a few years ago,” he said.

“You don't necessarily want to fire off all your shots too early in that kind of environment.”

If lenders pass the rate cut on in full, home owners with a $300,000 mortgage will save an average of about $48 a month on repayments.

UBS interest rate strategist Matthew Johnson said the decision was motivated mainly by downgrades to the global economic growth outlook and the RBA's financial markets conditions assessment.

“There is potential for both of those views to be downgraded further,” he said.

For example, they left the US steady, they can be downgraded, and financial markets can continue to flake out if something bad happens in Europe.”

Mr Johnson said the bond market rallied following the rates decision and the futures market was pricing in a 100 per cent chance of another 0.25 percentage point rate cut in July, with the possibility of a 0.5 percentage point cut.