Key Points:

New Zealand's banks have been told to pass on the benefits of today's record 1.5 percentage point cut in official interest rates.

Making his move this morning, Reserve Bank governor Alan Bollard made it clear the bank wants today's cut to make its way to consumers. He pointed out that profit margins for the banks were stable or growing.

"To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers," he said.

ASB Bank, Kiwibank, Westpac, BNZ, SBS Bank (formerly the Southland Building Society) and ANZ National have responded to today's cut by reducing their interest rates.

ASB has cut its variable rate from 8.7 per cent to 7.95 per cent, while SBS has cut from 9.15 per cent to 7.2 per cent.

Kiwibank today cut its floating rate from 7.95 per cent to 7.45 per cent, its six month rate from 7.49 to 6.99 per cent, its one year fixed term 6.99 per cent to 6.49 and its 2 year rate from 7.59 to 7.19.

Westpac has left its floating rate unchanged, but has today moved to cut its fixed terms.

Its six month term has fallen 0.25 per cent to 7.1 per cent, while its one year rates have fallen by 0.5 per cent to 6.8 per cent. Heading further out, its rates have been cut by between 0.4 per cent and 0.55 per cent.

Westpac is pointing out that its most recent cuts on November 20 applied to more than just its mortgages, with credit card, business and agriculture rates also falling& "rates that other banks have yet to address".

"We have noted the Reserve Bank Governor's comments and restate our commitment to passing on to our customers the benefits of reductions to our cost of funds as we are able. We continue to review all rates on an ongoing basis," said a bank spokesman.

BNZ has cut its six month mortgage rates by 0.5 per cent, moving from 6.99 per cent to 6.49 per cent. Rates on its 'totalmoney' product are coming down from 8.29 per cent to 7.75 per cent.

ANZ and National have made cuts across the board, cutting fixed term rates as much as 0.66 per cent and their variable rates half a per cent.

Asked about the need for an explicit statement asking the banks to pass on the rate cuts, Bollard said: "Because obviously we are cutting monetary policy for a purpose - we want that to result in easing monetary conditions through the economy - we want that to be reflected in interest rate reductions both for the corporate sector and the household sector both of which have been quite constrained recently."

Asked if the banks had been grudging in their passing on of previous cuts, Bollard said there had been cuts in rates after the October OCR cut.

"So far, we've seen much if perhaps not all of the 100 basis point cuts we did in October being passed through. We've seen some discussion by banks they might have pre-empted some of that and indeed pre-empted some of today's [cuts] - well, that really depends on where you start your calculations from."

"But we also do observe that margins have stayed quite high - and indeed grown in the banking sector - it's not an easy time in the banking sector at the minute, but it's a time through these economies where really all the institutions need to share both some of the pain and some of the need to pass on easier conditions."

Bollard will be hoping that a cut in mortgage rates, along with recent tax cuts and falling fuel prices, will help stimulate an economy that is in recession.

The OCR now stands at 5 per cent. The equivalent rate in Australia is 4.25 per cent, in the UK it is 3 per cent and it is just one per cent in the US.

A cut of this scale would have been unimaginable just 12 months ago, but the past year has been one that few but the gloomiest of pessimists could have expected. The previous OCR was 6.5 per cent.

A 1.5 percentage point cut is the biggest since the OCR was introduced in 1999. It follows on from the previous record cut - one percentage point - in October this year. The OCR has not been this low since December 2003.

Finance Minister Bill English said the rate cut would help stimulate the recession-hit economy.

"The drop in interest rates alongside the significant tax cuts in the government's stimulus program mean that we will take the hard edge off the recession." he told The Associated Press.

"It will be some time before the economy gets going again but we would hope the worst scenarios of sharply rising unemployment won't occur - but it's still going to be a tough time," he added.

Current data suggested the economy was "bouncing along the bottom of a shallow recession" rather than being "headed for something sharp," English noted.

Bollard said this morning that "ongoing financial market turmoil and the marked deterioration in the outlook for global growth have played a large role in shaping today's decision".

He said: "Activity in most of our trading partners is now expected to contract or grow only very slowly over the next few quarters.

"Economic activity in New Zealand will be further constrained as a result, compared with our view in October."

Inflation was abating in New Zealand and overseas as a consequence of these developments, so the bank now had more confidence that it would return "comfortably" inside the target band of 1 to 3 per cent some time in the first half of next year.

"However, we still have concerns that domestically generated inflation (particularly local body rates and electricity prices) is remaining stubbornly high," Bollard said.

The next scheduled OCR announcement is on Thursday, January 29.