Wellington - New Zealand's central bank cut its benchmark interest rate by an unprecedented 1 per cent to 6.5 per cent on Thursday, its third cut in 13 weeks after making no reductions for five years.

Governor of the Reserve Bank Alan Bollard cited "ongoing financial market turmoil and a deteriorating outlook for global growth" as main reasons for the record cut, which had been widely predicted.

The bank had cut its Official Cash Rate (OCR) to 8 per cent on July 24 after keeping it at 8.25 per cent - one of the highest in the developed world - for 12 months in a bid and reduced it again to 7.5 per cent on September 11.

The 1 per cent cut had been widely anticipated by analysts despite this week's revelation that the inflation rate had hit an 18-year high of 5.1 per cent - well over the bank's maximum target of 3 per cent.

Bollard said economic activity in New Zealand, which is officially in recession after two quarters of negative economic growth, would be further constrained by international developments.

"New Zealand can expect to face lower demand for exports and credit is likely to be less readily available," he said. "In this environment consumers and businesses are likely to be more cautious and curtail spending."

Bollard said the bank expected annual inflation to return to the target band about the middle of 2009, despite continued concerns that labour costs, local body rates, electricity prices and construction costs remained stubbornly high.

He foreshadowed cutting interest rates further but said the timing and extent of these would depend on actual reductions in domestic cost pressures and global financial developments. (dpa)