The Reserve Bank of New Zealand has cut the official cash rate by 25 basis points to 3.25 per cent – the first cut in over four years.

The cut saw the NZ dollar drop by 2.4 per cent to US 70.3 cents. One Australian dollar now buys $NZ1.10.

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Reserve Bank Governor Graeme Wheeler said a more pronounced fall in export prices that began in the middle of last year is a driver behind the cut.

“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,” Mr Wheeler said.

The RBNZ has an inflation target range of between one per cent and three per cent annually.

“A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium-term inflation converges towards the middle of the target range.

“We expect further easing may be appropriate,” he said.

The New Zealand dollar fell as low as 70.11 US cents, from 72.07 cents immediately before the decision was released at 9am (0700 AEST). It was recently trading at 70.57 US cents.

He said despite recent declines in the NZ dollar it remained overvalued.

“A further significant downward adjustment is justified,” he said.

The bank expects the country’s terms of trade will be about five per cent lower than in its March projections, primarily on the sharp decline in dairy prices.

– with AAP