Record low: Reserve Bank cuts rate to 1.75 per cent, but banks won't pass to customers

Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell.

The New Zealand dollar rallied by more than half a US cent after the Reserve Bank cut its official cash rate by 25 basis points to 1.75 per cent, based on market expectations that the move would be the last in the current easing cycle.

The Kiwi went from US$72.83 just before the 9am announcement to US73.6c immediately after, before returning to around US73.44c by 9.12 am.

Governor Graeme Wheeler said the US election result was taken into consideration when deciding to make the cut.

"We considered the decision again in light of the US election result and reaffirmed it was the right decision."

The newly elected President Donald Trump was just one of the risks facing global economy, Wheeler said, with Britain's exit from the European Union and uncertainties in China also considered to be global risks.

Watch: Graeme Wheeler reaffrims decision to cut rate

"It's one of the risks, there's uncertainty about Brexit and article 50, there are a lot of uncertainties about China and we have seen a result over night that has clearly surprised the market."

National house price inflation was "excessive" and posed risks to the nation's financial stability, Wheeler said.

While rising prices in Auckland had moderated, the outlook was uncertain due to the lack of supply in the country's biggest city, he said.

Economists were widely expecting the cut, but don't believe it will bring fixed term mortgage rates down and instead they are likely to head upwards on the back of rising international borrowing costs for the banks.

Wheeler said in a statement today's cut was projected to see inflation settle near the middle of the target range.

"Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly. "

Wheeler again bemoaned the strength of the currency, but stopped short of indicating the Reserve Bank would intervene in foreign exchange markets.

"The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector," he said. "A decline in the exchange rate is needed."

ANZ senior economist Sharon Zöllner said it looked as if the easing cycle was now complete.

"They made it pretty clear that they expect that that are now done," she said. "There is the mildest of mild easing biases left here, I suppose, with the official cash rate track suggesting just a 20 per cent chance of another cut," she said.

In its statement, the Reserve Bank said significant surplus capacity exists across the global economy despite improved economic indicators in some countries. Global inflation remains weak even though commodity prices have come off their lows. Political uncertainty remains heightened and market volatility is elevated, it said.

Economists expect the Reserve Bank to keep rates on hold from here on.

ASB Bank said inflation is likely to be back within the bank's 1-3 per cent target band at the next read, due in January.

"Dairy prices have recovered considerably, the labour market is tightening and growth is running at an above-trend pace," it said.

"It is not an economy that is crying out for urgent stimulus to boost inflation."

Read the full announcement here:

- with BusinessDesk