The Reserve Bank has cut the Official Cash Rate to 3 per cent.

The New Zealand dollar fell along with other commodity currencies ahead of the expected interest rate cut.

Since September the central bank's tightening bias has been on hold, and last month it cut rates, while signalling further cuts could come.

The Bank of New Zealand's head of research Stephen Toplis said there were huge risks to the economic and inflation outlook and sees a stronger case for a deeper OCR cut. "If dairy prices don't recover and drought hits we could be headed for recession and much lower rates. But if the currency keeps falling, much higher headline inflation will pose a significant challenge for the Reserve Bank suggesting significant upside pressure for rates even as the economy softens," he said.

Westpac Bank's chief economist Dominick Stephens is forecasting the cash rate to be 2 per cent by December, with four 25 basis point cuts from this week.

Governor Graeme Wheeler said global economic growth remained moderate with only a gradual pick up in activity forecast. He highlighted recent developments in China and Europe that had led to heightened uncertainty and increased financial market volatility.

The New Zealand economy was growing at an annual rate of around 2.5% and was supported by low interest rates, construction activity and high net migration. The bank saw growth running at around 3% in its June MPS.

The significant fall in the New Zealand dollar since April and lower interest rates had significantly eased monetary conditions, Wheeler said.

Most economists expected the cut, though others said the headwinds facing the New Zealand economy required a larger cut - possibly down to 2.75 per cent.

The bank chose not to cut by the 50 basis points that some had hoped, arguing that the sharp fall in the New Zealand dollar this year and higher oil prices would help lift annual inflation to close to the mid-point of the bank's 1-3% target range by early 2016.

Sources: NZ Herald | Interest.co.nz