The Reserve Bank has cut the official cash rate by a quarter of a percent to a new low of 2 percent.
It has also signalled at least one more rate cut is on the way.
The cut to the OCR has prompted a rally in the New Zealand dollar and has seen New Zealand's largest lender cut its floating mortgage rates.
However ANZ has not passed on the full rate cut, instead opting to lift some deposit rates.
Within minutes of the OCR cut, ANZ announced it was cutting its floating home loan rate by 0.05 percent to 5.59 percent.
ANZ's floating rates for commercial, farming and business loans are being cut by 0.15 percent.
It will also cut lending rates by 0.20 percent for first home buyers who use KiwiSaver.
ANZ is not passing on the full 0.25 percent rate cut, but says it is lifting some term deposit rates by up to 0.30 percent to 3.60 percent.
ANZ chief executive David Hisco says "On the deposits side, we have five times as many customers as those with home loans. Lifting term deposit rates will help customers grow their savings."
"We are sending a strong signal today to New Zealanders that at a time of record low interest rates, it is more responsible to pay down home loans and save, than borrow more. New Zealanders need to consider changing their financial strategies."
Westpac has announced it's reducing its floating mortgage rates and introducing a new six month term deposit special.
The new floating mortgage rate has been reduced by 10bps to 5.65 percent and applies to Choices Floating, Choices Everyday and Choices Offset.
The rate will be effective for new lending from Friday 12 August and from 31 August for existing customers.
The special six month term deposit rate will be 3.50 percent, an increase of 50bps on the current six month term deposit rate. This is effective Friday 12 August.
The Reserve Bank (RBNZ) highlighted slow global growth, low global interest rates and the high New Zealand dollar as reasons for the rate cut.
"Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate."
"The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector."
The RBNZ expects inflation to rise to 1 percent by the end of this year - just within its 1-3 percent target range.
The RBNZ also indicated at least one more rate cut is on the way, saying that "further policy easing will be required to ensure that future inflation settles near the middle of the target range."
Economists at Westpac and ASB both say they expect another OCR cut in November, taking the OCR to 1.75 percent.
However they agree that if the dollar stays strong a rate cut next month is possible and the OCR could ultimately go lower than 1.75 percent.
ANZ economists are picking a 0.25 percent cut in November and another 0.25 percent cut in the new year.
The New Zealand dollar has risen to 72.70 US cents, compared to 72.10 cents prior to the 9am announcement.
The kiwi has risen to 94.29 Australian cents, compared to 93.61 before 9am.
It was trading at 55.88 British pence at 10.20am, compared to 55.18 pence before the decision was released.
Both Labour and the Greens say the Reserve Bank was forced to cut the official cash rate because of National's ignorance.
Green Party finance spokeswoman Julie Anne Genter says the RBNZ had to show economic leadership.
"The real New Zealand economy is suffocating under National's short-term, politically expedient approach. The Governor called house price inflation excessive and raised the stakes of a major shock to the economy should house prices correct."
Labour agrees, with finance spokesman Grant Robertson saying it isn't a recipe for sustainable long-term productive growth.
"The Government cannot outsource managing the economy to the Reserve Bank - it needs to take concrete steps to ensure hard-pressed exporters can compete internationally."
The parties say exporters are losing out to the housing crisis. If the Bank were to have cut the OCR further, it would have risked reigniting the market.
"National needs to stop sitting on its hands over housing. Today's announcement won't build any more houses but will be another shot in the arm for speculators," Mr Robertson says.
Julie Anne Genter says "National's failure to stop housing speculation and build enough affordable homes is making the wider economy more vulnerable to damaging economic shocks".
The Greens say a capital gains tax and foreign buyer restrictions is the answer, while Labour is calling for an urgent monetary policy review.