The Reserve Bank has slashed the Official Cash Rate (OCR) to 1 percent by a bigger-than-expected 50 basis points (bps).
The cut comes as it looks to prop-up a cooling economy as global economic activity continues to weaken, easing demand for New Zealand's goods and services.
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"GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets," it said in a statement.
"Heightened uncertainty and declining international trade have contributed to lower trading-partner growth. Central banks are easing monetary policy to support their economies.
"Global long-term interest rates have declined to historically low levels, consistent with low expected inflation and growth rates into the future."
The central bank lowered its cash rate by 25 basis points (bps) in May, and economists polled by Reuters had predicted policymakers would cut rates again this week by 25 bps.
Independent economist Cameron Bagrie says the larger cut shows the bank is "not prepared to muck around".
"The Reserve Bank has bought out the big bazooka today, there's no mucking around," he says.
"The economy is softening, growth has slowed in the past year. Growth headwinds are rising, and slowing growth is just inconsistent with getting inflation back to the 2 percent inflation midpoint."
New Zealand economists believe mortgage interest rates will drop a bit further in the coming months, but not as low as the 1 percent to 2 percent rates other countries have experienced.