It has also been struggling with a stubbornly strong Australian dollar. A rate cut usually weakens a currency.
The rate cut is the second since October and came after the Reserve Bank of Australia's monthly policy meeting.
Australia's cost of borrowing is now at the same level it was during the global financial crisis of 2009.
The Australian dollar was little changed on the news, while the main Sydney stock exchange was down slightly.
Analysts said that as the mining boom starts to run out of steam, the other sectors of the economy will have to take over and drive growth.
"The urgency to actually find a replacement for mining investment has become quite acute," said Brian Redican of Macquarie Bank.
Mr Redican said more action will be required from the Reserve Bank of Australia.
"In 2013 there will be further aggressive rate cuts, although there is nothing in this statement that suggests that the Reserve Bank is thinking along those lines."
Demand for Australian commodities has meant that its economy has remained buoyant during the recent global slowdown whilst Europe and the US have slowed down.
However, that demand mainly from China is beginning to taper off as the slowdown starts to hurt Asia as well.
Prices for Australia's commodities have fallen as a result and the value of its exports has been reduced.
The strength of the Australian dollar is also causing problems for the economy hurting sectors such as tourism and manufacturing.
In a statement on Tuesday, central bank governor, Glen Stevens, said the dollar remains "higher than might have been expected" given lower export prices and a weaker global outlook.
The Australian dollar is above parity with the US dollar.
Businesses have been suffering as a result with the unemployment rate at a two-and-a-half year high.

A criminal investigation has begun into Pyotr Pavlensky's actions at the Kremlin wall on Sunday, the interior ministry told news agencies in Moscow.
Pavlensky was arrested but released the following day and placed under travel restrictions.
However, the 29-year-old now faces the charge of hooliganism.
The hooliganism charge is used to prosecute perceived breaches of public order. It is the same charge used to jail members of the punk band Pussy Riot, and to prosecute activists from the Greenpeace ship Arctic Sunrise.
The St Petersburg performance artist had reportedly sat for an hour and a half on the square on Sunday afternoon, with a nail driven through his genitals into the ground. His "fixation" act, he said, was a metaphor for apathy in Russia.
Critics of Russian President Vladimir Putin accuse the veteran leader of presiding over a crackdown on dissent since his re-election in March last year.
A police source told Interfax news agency that the article under which Pavlensky was being charged carried a wide range of penalties. starting with a fine and going up to a five-year prison sentence.
His graphic act outside the Lenin Mausoleum was recorded on video which was put online.
Timing his act to coincide with Police Day, Pavlensky said in a statement published on Sunday: "When the authorities turn the country into one big prison, openly robbing the populace and channelling funds to increase and enrich the police and other security agencies, society accepts arbitrariness and, having forgotten its advantage in numbers, brings the triumph of the police state closer through its inaction."
Pavlensky previously attracted attention by sewing his lips together in July of last year and demonstrating outside St Petersburg's Kazan Cathedral in support of the imprisoned Pussy Riot protesters. In May of this year, he wrapped his naked body in a "cocoon" of barbed wire outside the city's parliament.
Fellow figures from the Russian arts world praised his Red Square act in comments on grani.ru, with one calling it a "powerful gesture of absolute despair" and another, "a manifesto of powerlessness".
Australia's central bank has cut its benchmark interest rate by 25 basis points to 3%, as it looks to counter a slowdown in its mining sector.
[NEXT_CONCEPT]
A naked performance artist who nailed his scrotum to Red Square as a political protest may face up to five years in prison, Russian media report.