The Reserve Bank has cut the benchmark rate to 3.25 percent, and signalled more may be on the way.

Growth in the global economy remains moderate and volatility in financial markets has increased.  The dairy sector's weak outlook weighed on the nation's terms of trade and threatened to delay an increase in inflation from its near-zero level. The fall in export commodity prices that began in mid-2014 is proving more pronounced. The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed. 

The New Zealand dollar fell to 70.11 US cents from 72.07 cents.

Banks immediately moved to reduce home loan rates, with Westpac chief economist Dominick Stephens saying the markets were surprised by the early cut. He said one consequence could be a further drop in fixed mortgage rates, which will stimulate the housing market.

Just six of sixteen economists forecast today's rate cut.

The central bank expects the country's terms of trade will be about 5 per cent lower than in its March projections, primarily on the sharp decline in dairy prices.  This suggested monetary policy needed to be more stimulatory to stoke inflation back into the target range of 1 percent to 3 percent annually.

Read the Reserve Banks announcement

Additional source: NZHerald