Australia's central bank cut interest rates to an all-time low of 1.75 percent on Tuesday, the first easing in a year as it seeks to restrain a rising currency and insulate the economy from creeping deflation.

The Reserve Bank of Australia (RBA)'s quarter-point cut sent the local dollar down more than one US cent to $0.7567 as markets wagered a further move to 1.5 percent was now likely.

Banking stocks took off on the prospect of an increased demand for mortgages, lifting the benchmark index 1.8 percent.

Speculation of a possible cut flared last week when government data showed inflation had slowed far more than expected in the first quarter of the year.

Underlying inflation dropped to a record low of 1.5 percent, taking it well under the RBA's long term target band of 2 percent to 3 percent and effectively pushing real rates higher.

"Inflation has been quite low for some time and recent data were unexpectedly low," RBA Governor Glenn Stevens said in a brief statement after the bank's May policy meeting.

"These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast."

Central banks around the globe have been taking ever more exotic steps to reflate their economies, chopping rates under zero and buying trillions in assets.

That easing abroad has in turn boosted the Australian dollar further than the RBA desired, hurting exports and tourism while pushing down import prices and, hence, inflation.

Reuters