The Chinese automaker unexpectedly cut $6000 from the cheapest price for its MG4 electric vehicle on Monday, announcing the release of an entry-level model at $38,990.
The vehicle will be the first electric car to launch in Australia for less than $40,000.
The move comes three days before rival BYD had promised to release "the most affordable" electric car in the country and experts say it could have the firm "sharpening their pencil" for more price reductions.
MG Motor Australia chief executive Peter Ciao said the brand chose to release a cheaper version of its electric hatchback to see more "Aussies get into an electric vehicle sooner than later" amid rising interest rates and inflation.
"I know they are feeling those rising pressures at supermarkets, when they're buying fuel, when they're paying their energy bills," he said.
"There is no doubt that the cost of living is the number one issue right now for Australians and we're trying our best to help by making EV affordable with the release of MG4 at under $38,990 plus on road costs."
The MG4 base model will feature a smaller battery with a range of 350 kilometres, compared to 435km for the $44,990 model.
MG will also discontinue its entry-level electric SUV in Australia, the ZS EV Excite, to make way for the new model.
The announcement came before BYD's event on the Gold Coast on Thursday, when the company was expected to show off "the most affordable, high-quality EV launched in Australia".
The BYD Dolphin was announced in New Zealand earlier this month for a price equivalent to $45,000.
Australian Electric Vehicle Association national president Chris Jones said the fierce competition between the two major electric vehicle brands would ultimately benefit buyers.
"This means that BYD will have to sharpen their pencil," he said.
"These companies know that Australian demand for EVs is not going away."
Dr Jones said the launch of two smaller electric vehicles would also give Australian motorists greater choice and help to reduce the average size and weight of vehicles.
Motorists could also expect more smaller vehicles to launch locally, he said, after the introduction of a fuel-efficiency standard late this year or early next year to cap vehicle pollution across fleets.
Electric vehicles made up 7.7 per cent of all new cars sold in May, figures from the Federal Chamber of Automotive Industries show.
BYD's Atto 3 was the second most popular electric car, following Tesla's Model Y, with MG's ZS EV ranking fourth.
