Global growth is below trend despite being supported by unprecedented levels of monetary stimulus, the bank said in a statement.Looking ahead, the bank said more cuts may be required.
"Monetary policy will continue to be accommodative," it said.
We are sending a strong signal today to New Zealanders that at a time of record low interest rates, it is more responsible to pay down home loans and save, than borrow more.
"Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range," it said. The central bank aims to get inflation within an annual 1 to 3 per cent range.
Banks are not expected to pass on the full official cash rate to home-buyers because of their rising funding costs.
Deposits have not kept pace with loan growth meaning banks are having to fund more of their lending through the international money market and the cost of borrowing in that market has increased because of concerns over slowing growth in China, fall-out from Brexit and the US elections.
Reserve Bank governor Graeme Wheeler says he would like to see most of its OCR cut passed on by the banks to their customers but believes it is up to individual banks to make that call.
"It is a very competitive market. We don't want to end up directing banks on pricing."
Wheeler said bank's net interest margins were trending downwards and were in line with international rates.
Fixed term mortgage rates - where most home-owners had their mortgages - had also fallen.
"If you look at the two to three year fixed rates over the last couple of years, and since June last year when we began cutting, they have fallen more than the OCR."
"It is a complicated assessment."
He said banks would need to think about being competitive and their net interest margins. Wheeler said banks' offshore funding costs had also risen a bit and were likely to rise further as banks had to roll over their funding.
It is a very competitive market. We don't want to end up directing banks on pricing.
He also pointed to strong lending growth which was outstripping deposit growth and said that could see deposit rates head up as the banks try to increase their deposits.
Wheeler said low interest rates for savers were a concern but it was up to banks to make a call on whether they wanted to lower lending rates or attract higher deposits.
ANZ is the first bank to cut floating lending rates in response to this morning's cut but home buyers will get just a tiny fraction of the benefit.
But the country's largest bank said it would only slice 0.05 percentage points off the floating rate for its floating home loans and flexible business loans.
Bigger cuts will be made available to its commercial, agricultural and business borrowers with floating rates cut by 0.15 percentage points for those lenders but even they do not get the full 0.25 cut made by the central bank.
However the bank did have some good news for savers - where it plans to increase some term deposits by up to 0.3 percentage points.
ANZ chief executive David Hisco said ANZ was refocusing its lending and borrowing emphasis.
"On the deposits side, we have five times as many customers as those with home loans. Lifting term deposit rates will help customers grow their savings," Hisco said.
"We are sending a strong signal today to New Zealanders that at a time of record low interest rates, it is more responsible to pay down home loans and save, than borrow more. New Zealanders need to consider changing their financial strategies."
The bank will also provide a special rate to first home buyers who use KiwiSaver slicing off 0.20 percentage points.
Westpac economists said they also expected a further 25 basis point cut to the rate in November, taking it to a low of 1.75 per cent.
"However, we acknowledge that the September official cash rate review is 'live', and that there could be more than one further rate cut in the coming months," the bank said.
Wheeler also revealed the Reserve Bank is to take a significant step towards the possible introduction of income-related restrictions on mortgage lending.
Debt-to-income ratios stop people from borrowing too much relative to their income.
They are already used in the United Kingdom, where most buyers cannot get a mortgage higher than 4.5 times their annual earnings.
It is not clear at what level restrictions might be set here, but Wheeler has indicated they are more likely to target investors.
The Government has a Memorandum of Understanding (MoU) with the Reserve Bank on which tools it can use to curb mortgage lending.
The MoU would have to be amended before an income cap could be introduced.
Speaking this morning, Wheeler said they were likely to report to Finance Minister Bill English in the next week or two to seek such an amendment.
Debt-to-income ratios were not likely to be in place this year, Wheeler said, but work was progressing, including discussions with English, Treasury and the major banks.
Last month the Reserve Bank announced new loan-to-value ratios (LVRs) that will officially take effect on September 1, but which banks were expected to implement immediately.
The changes meant property investors nationwide now need a 40 per cent deposit.
ANZ senior economist Phil Borkin said the market had reacted to the statement being not as "dovish" - or soft on inflation - as many had expected.
"The Kiwi has popped higher on the back of this because the market was expecting a more dovish signal from the Reserve Bank," Borkin said.
"We think that that will maybe fade because there are significant risks that the official cash rate will go significantly lower from here," he said.
- with Nicholas Jones
See the full Monetary Policy Statement here:
