Australia's Reserve Bank has cut rates by a shock one percentage point for the first time in more than 16 years because of the severe conditions in international markets.

Our reporter Lexi Metherell reports the cash rate now stands at 6 per cent.

Most economists had been predicting a cut of 0.5 percentage point.

Today's cut is the first official one percentage point move since 1994.

In its accompanying statement, the Reserve Bank says conditions in international financial markets took a significant turn for the worse in September, and there's evidence of slowing economic growth in Australia's trading partners in Asia.

It says there's now the risk that Australian economic demand and output could be significantly weaker than it had earlier expected.

It notes banks are facing higher costs, and says the unusually large movement in the cash rate is needed in order to bring about a significant reduction in the interest rates they charge.

The Reserve Bank's shock rates decision has been widely welcomed.

But the big four banks -- ANZ, Commonwealth, Westpac, National Australia Bank -- have announced they will not pass on the full 1 percentage point rate cut to borrowers.

Westpac's Peter Hanlan says it's done what the RBA wanted.

"We were very keen to be able to pass on 0.8 per cent, to really provide that stimulus and that feedback that we think people are looking for."

The offical cash rate now stands at 6 per cent.

Australia's treasurer Wayne Swan has defended the right of banks to hold back from passing on the full amount of today's interest rate cut.

Mr Swan says the government's position will change when the global financial crisis ends.

"The government expects that the banks will pass on in full official rate cuts when conditions normalise, that is our bottom line, when conditions normalise we do expect that the banks will pass on in full official rate cuts."

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