The official cash rate (OCR) has dropped 0.25 percent to 3 percent, and it might not be the last cut this year.
The rate cut is consistent with the weaker economy with slumping dairy prices, a drop in consumer and business confidence and slowing demand from China.
Reserve Bank Governor Graeme Wheeler has indicated there might be more cuts this year. He says growth is softer than the June monetary policy statement.
"Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand dairy exports has fallen sharply."
House prices in Auckland continues to be a concern, however the Mr Wheeler says outside New Zealand's biggest city, house price inflation generally remains low.
Headline inflation remains very low at 0.3 percent, well below the bank's target of 1 - 3 percent.
The Reserve Bank is also pointing to recent developments in Europe leading to heightened uncertainty to justify the drop.
Although the New Zealand dollar has declined significantly since April, Mr Wheeler says further rate reductions are necessary given the weakness in export commodity prices.
This is the second consecutive interest rate drop this year. The central bank last slashed the OCR 0.25 percent in June, before which interest rates remained on hold for almost a year.
Immediately following the announcement, Kiwibank dropped its variable and revolving mortgage interest rates, bringing floating rates down from 6.4 percent to 6.15 percent.
The change would be immediate for new customers and will take effect in two weeks for existing customers.
Meanwhile, ASB is predicting further cuts of 0.25 percent in September and October, bringing the OCR to 2.5 percent.
"That, along with the weakening New Zealand dollar, will help prop up the broader economy and push inflation back towards the 2 percent mid-point of the inflation target," ASB chief economist Nick Tuffley says.
ASB says the key message from the Reserve Bank is that it wants to see the New Zealand dollar lower.
The Real Estate Institute of New Zealand believes in the short-term, lower interest rates will likely put "upward pressure" on house prices – particularly in Auckland and other regions where Auckland investors are eyeing up property.
"Demand pressures remain high in comparison with the build rate for new dwellings," chief executive Colleen Milne says.
However, recently introduced restrictions on loan-to-value ratios and the upcoming requirement for foreign buyers to have a New Zealand IRD number and bank account "seem to be having some effect", the institute believes.
3 News / RadioLIVE