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The official cash rate has been cut to 3.5% - its lowest level since its creation a decade ago.
The OCR, which influences the price of borrowing money in New Zealand, stood at 8.25% in June last year, and Thursday morning's reduction brought the cumulative reduction since July 2008 to 4.75 percentage points.
It was widely expected that Reserve Bank Governor Alan Bollard would cut the OCR between 100 and 150 points and it now sits at a lower level than the first OCR, which was set at 4.5% in 1999.
Bollard says the news coming from New Zealand's trading partners is very negative in terms of exports and tighter credit conditions, and the decline in the global growth markets played a part in Thursday's decision.
"The global economy is now in recession and the outlook for international growth has been marked down considerably since our December Monetary Policy Statement," he says.
Bollard acknowledged the stimulus policies and packages put in place in other economies, but he says the timing and the strength of the recovery is unknown.
He says the Reserve Bank is keeping in close contact with the government over the prospect of further stimulus policy in New Zealand, but says this decision lies with the Ministry of Finance.
Flagging business confidence is also thought to be reflected in the cut, with ASB chief economist Nick Tuffley saying the recent New Zealand Institute of Economic Research survey was a reality check for many.
"[The survey] was a big wake up call in just how much it has deteriorated and just how much pressure has come on New Zealand businesses, even before we really start to see the real impact of the global economy," he says.
Bollard says inflation pressures are abating and the bank is confident that annual inflation would be comfortably inside the target band of 1% to 3% over the medium term.
"Lower interest rates will have a positive impact on growth, alongside a lower exchange rate and fiscal stimulus, provided firms and households do not unnecessarily contract their spending," he says.
He says that in order to get this response, financial institutions need to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers.
Bollard also acknowledges the New Zealand economy does need to save more, but that it mustn't do it in a massive move at the expense of consumption.
ONE News business correspondent Owen Poland says the interest rate cuts may not be enough to stimulate spending, particularly with employers indicating the likelihood of job cuts, and consumers reining in their spending accordingly.
Banks also say people are closing their wallets.
"We have seen people get a lot of cash back into their pockets and there are some signs that, with the uncertainty that's around, people are hoarding it." says Nick Tuffey, ASB's chief economist.
Bollard says further movements in the OCR are expected to be smaller than those seen recently.
However, Poland says analysts are already picking a 50 to 100 basis point cut in March and possibly a similar cut in April which could reduce the official cash rate to 2-2.5%.
