New Zealand's central bank cut interest rates for the first time in more than four years on Thursday, trimming the base rate 0.25 points to 3.25 percent amid lower-than-expected inflation.

The Reserve Bank of New Zealand moved to stimulate the economy after annual inflation for the year to March 31 came in at 0.1 percent, a 15 year low.

The last time the bank cut interest rates was in March 2011, to prevent the economy faltering after a devastating earthquake in Christchurch that killed 185 people.

It cited sharp falls in commodity prices, particularly dairy, as one of the factors behind the latest move.   

"A reduction in the OCR (official cash rate) is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range," it said in a statement.

The bank also signalled further rate cuts were possible.

"We expect further easing may be appropriate. This will depend on the emerging data," it said.

The bank's target inflation rate is 1.0-3.0 percent.

The rate cut had been tipped by some economists, although most market watchers believed the bank would leave rates on hold.

The bank lifted rates by 1.0 percent to 3.5 percent between April and July last year amid signs the economy was overheating and was seen as reluctant to cut rates for fear of fuelling runaway property prices in the country's biggest city Auckland.

However, the bank introduced loan restrictions last month that it said should help cool the city's housing market.

The rate cut prompted a drop in the New Zealand dollar from 72.00 US cents to 70.19 US cents.

The Reserve Bank has complained for more than a year that the currency is overvalued, hurting exporters, but it had remained stubbornly high despite efforts to talk it down.

Central bank governor Graeme Wheeler said the New Zealand dollar was still overvalued, even though it had declined from its peak in April, when it came close to parity with the Australian dollar.

"A further significant downward adjustment is justified," he said.

"In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand's net external position on a more sustainable path."

New Zealand's economy relies on the dairy industry, which account for sales of more than NZ$15.0 billion (US$10.6 billion) annually, or about a third of the South Pacific country's exports.

However, dairy prices have slumped by almost 50 percent in the past year due to exports from the United States and the removal of milk production quotas in Europe.