The Reserve Bank has cut its official cash rate by 25 basis points to a record low of 2.5 per cent.

ANZ Bank, New Zealand's biggest bank has cut its rates, reducing its floating home rate by 25 basis points to 5.74 per cent. is reporting that Westpac has now followed, cutting its fixed and floating mortgage rates.

BNZ has also dropped its interest rates in response to today's decrease in the OCR as follows:

BNZ Director of Retail and Marketing Craig Herbison Marketing Craig Herbison announced the changes in the wake of the Reserve Bank signalling further OCR cuts are unlikely until 2018.

Kiwibank has now also moved, cutting its variable, revolving and offset mortgage rates which have all been cut by 0.25 per cent to 5.65 per cent.

The Reserve Bank said growth in the New Zealand economy had softened this year, due mainly to lower terms of trade. "Combined with increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment," the bank said.

The New Zealand dollar rallied sharply after the rate was cut, gaining just over half a US cent to US67.30c on the news.

CPI inflation is below the bank's 1 to 3 per cent target range, mainly due to the earlier strength in the New Zealand dollar and the 65 per cent fall in world oil prices since mid-last year.

The Reserve Bank said the inflation rate was expected to move inside the target range from early next year, as earlier petrol price declines will drop out of the annual calculation, and the lower New Zealand dollar will be reflected in higher tradables prices. "Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range," .

At 2.5 per cent, the rate has revisited levels seen at the time of the global financial crisis and Christchurch quake, so economists said conditions would need to get much worse for the bank to drop it more.

Even at its new level, New Zealand rates remain substantially higher than most western countries' central bank benchmarks, making it an attractive prospect for overseas investors chasing yield.

Most economists had expected the bank to cut its rate and for 2.5 per cent to be the bottom.

The next official cash rate announcement is due on the 28th Jaunary 20016

Source: NZHerald