Wellington  - New Zealand's central bank slashed its benchmark interest rate on Thursday by a record 1.5 percentage points to 5 per cent and urged commercial banks to pass along the reduction to stimulate an economy in recession.

Noting that he had now cut a total of 3.25 percentage points from the official cash rate since July, Reserve Bank Governor Alan Bollard said, "We expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers."

Bollard - who has now cut the rate four times since July after five years with no reductions - said that bank margins had "stayed quite high and indeed grown" and that he was easing monetary policy for a purpose.

The bank had eased its official cash rate to 8 per cent on July 24 after keeping it at 8.25 per cent - one of the highest rates in the developed world - for 12 months in a bid to contain inflation.

The rate was reduced again to 7.5 per cent in September and then by a record 1 percentage points to 6.5 per cent in October.

"We want that to result in easing monetary conditions through the economy," Bollard said, adding that he wanted lower interest rates for householders and the corporate sector, which had both been constrained recently.

He cited "ongoing financial market turmoil and the marked deterioration in the outlook for global growth" as the main factors for taking the rate down to its lowest level in five years.

At least five banks cut their floating home loan rates following the announcement, and the locally owned Kiwibank also reduced its fixed rates - a significant move as 85 per cent of New Zealand homeowners with mortgages have fixed interest rates.

Bollard made it clear that he hoped lower mortgage rates, along with recent tax cuts and falling fuel prices, would help stimulate an economy that has been in recession for the last three quarters.

Business leaders hailed the reduction but pointed out that New Zealand interest rates were still well above those of its main trading partners, including Australia at 4.25 per cent, Britain at 3 per cent and just 1 per cent in the United States. (dpa)