The Reserve Bank of Australia (RBA) will also undertake quantitative easing measures for the first time in its history, purchasing Australian government bonds.
RBA officials made the decision at an emergency meeting, brought forward to deal with the ongoing COVID-19 crisis.
"The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system," RBA Governor Philip Lowe said.
In the past month the Australian share market has fallen by around 30 percent, which some experts considered a signal or technical recession.
Meanwhile the Australian dollar has also shed around 20 percent of its value, hitting an 18-year low of 55.41 U.S. cents in the lead up to the RBA announcement on Thursday.
"At some point, the virus will be contained and the Australian economy will recover," Lowe said.
"In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly."
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