WELLINGTON - NEW Zealand's central bank cut the official interest rate by an unprecedented one percentage point on Thursday in the face of the global financial turmoil.

Reserve Bank of New Zealand Governor Alan Bollard said after the bank's regular six-weekly review that the official cash rate would be cut by one percentage point to 6.5 per cent.

Mr Bollard said ongoing global financial market turmoil and deteriorating prospects for world growth meant the outlook for the New Zealand economy had worsened.

New Zealand is already in recession after the economy shrank in the March and June quarters of this year.

'New Zealand can expect to face lower demand for exports and credit is likely to be less readily available,' Mr Bollard said.

'In this environment consumers and businesses are likely to be more cautious and curtail spending.'

The central bank has never previously cut interest rates by more than half a percentage point since it introduced the official cash rate in 1999.

The unprecedented cut came despite news this week that inflation reached 5.1 per cent in the year to September, the highest level for 18 years.

Weaker short-term growth and sharply lower oil prices mean inflation should return to the central bank's target band of one to three per cent around the middle of next year, Mr Bollard said.

'Should the outlook for inflation evolve as projected we would expect to lower the official cash rate further,' Mr Bollard said.

But he said future interest rate cuts would depend on evidence of reductions in domestic cost pressures as well as global financial developments.

The central bank cut interest rates by half a percentage point at its last review in September, citing the global financial crisis. -- AFP