By Jessica Sier

In the biggest interest rate cut since 2009, the Reserve Bank of Australia (RBA) has slashed rates by 3.75 per cent.

The RBA move has been seen to stimulate Australia’s stagnating economy and promote growth.

Although economists were expecting the RBA to drop rates, the cash-rate cut of 50 basis points has surprised market-watchers and business analysts.

This is the first rate cut in 2012 by the Reserve Bank.

All eyes are now on the commercial banks to see if this cut will materialise in lower interest rates.

RBA governor Glenn Stevens says the move was prompted by a lower inflation outlook.

“This decision is based on information received over the past few months that suggests economic conditions have been somewhat weaker than expected, while inflation has moderated,” he says.

The world economy’s growth slowed in the latter half of 2011 and the RBA believes it is likely to continue at a below-trend pace this year.

The Australian dollar fell sharply on the news of the rate cut, losing more than 0.5 US cents to $US1.035 .

AAP economist Garry Shilson-Josling says the 3.75 per cent rate is not likely to be passed on fully to borrowers.

“Since December, banks have jacked up their borrowing and lending rates, meaning the RBA had to lower the cash rate even further to get those market rates down to where it wanted them,” he says.

The ASX200 closed the trading day up 0.7 per cent higher, the All Ordinaries index was up 30.5 points and the Australian dollar was worth $US1.0333.