SYDNEY - Australia's central bank on Tuesday cut its official cash rate by 25 basis points to 3.85 percent, the lowest level in two years.

The monetary policy board of the Reserve Bank of Australia (RBA) said in a statement that it made the decision at its meeting in Sydney on Tuesday, adding that maintaining low and stable inflation is the priority.

It is the second time in 2025 that the RBA has lowered interest rates following a cut in February, which was the first since November 2020, and marks the rate's lowest level since May 2023.

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The monetary policy board said that inflation has fallen "substantially" since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance, but it also warned of "uncertainties" about the outlook for economic activity in Australia and abroad.

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Uncertainty in the world economy has increased over the past three months, the board said, adding that there are uncertainties about the outlook for domestic economic activity.

"While today's policy decision recognizes the welcome progress on inflation, the board remains cautious on prospects for further policy easing," it said. "The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome."

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Treasurer Jim Chalmers said he was "really pleased to see" the rate cut and it reflects the "substantial progress we've made on inflation."

"Today's interest rate cut doesn't mean that the job is finished when it comes to the cost of living, but it will help millions of Australians with a mortgage."

Australia's "big four" banks have all quickly announced they will pass on the 0.25 percentage point rate cut to those with a mortgage, according to the Australian Broadcasting Corporation (ABC).