Although the markets had officially priced in a 0.5% fall, banks were keen to avoid accusations of price gouging on lending rates, as has happened in the past.
Reserve Bank governor Alan Bollard said the earthquake in Christchurch had caused substantial damage to property and buildings and immense disruption to business activity.
"While it is difficult to know exactly how large or long-lasting these effects will be, it is clear that economic activity, most certainly in Christchurch but also nationwide, will be negatively impacted. Business and consumer confidence has almost certainly deteriorated."
Even before the earthquake, GDP growth was much weaker than expected through the second half of 2010, he said.
Households had continued to be very cautious with retail spending volumes and residential both falling.
The export sector had benefited from very high commodity prices but farmers had focused on repaying debt rather than increasing spending.
Also, the early summer drought had constrained farm output.
"Signs the economy was beginning to recover early in 2011 have been more than offset by the Christchurch earthquake," Dr Bollard said.
In putting together the forecasts released with the monetary policy statement, the Reserve Bank had to make many important assumptions based on limited information.
During the coming weeks and months, those judgements would be tested as new information came to hand.
For now, GDP growth was projected to be quite weak through the first half of the year.
That would gradually build up to a very large reconstruction programme by 2012 that would last for some years and contribute to a period of relatively strong activity, Dr Bollard said.
Craigs Investment Partners broker Chris Timms said Dr Bollard was clearly concerned about the economic outlook.
Removing the GDP forecasts from the monetary policy statement was big news and showed there were too many uncertainties to provide quarterly forecasts.
"But looking at the bank chart, they are expecting 2010 growth to be 0.5%, 2011 to be about the same and then a sharp ramp up to 4% in 2012 as reconstruction comes through."
The rebuilding of Christchurch could add 2.5% to economic growth next year.
The "oil shock" was seen as having only a modest impact on growth and inflation.
The Reserve Bank had oil at $US110 ($NZ150) per barrel in its forecasts, he said.
Dr Bollard took the unusual step of consulting Finance Minister Bill English to ensure his policy would help fiscal policy, Mr Timms said.
Prime Minister John Key had earlier announced that a 0.5% cut would be helpful.
ASB chief economist Nick Tuffley said the cut would give the economy some much-needed support in the short term.
It would also settle down interest rate markets as there would be far less second-guessing about any further OCR movements as a run of weak data got released in the next three to four months.
"The Reserve Bank made it clear that this cut is likely to be it. Inevitably, markets will turn to anticipating the eventual lift back up in interest rates."
Timing would be influenced by when the reconstruction activity in Christchurch started to increase and brought back the focus on the resultant and persistent inflation pressures, Mr Tuffley said.
A second influence would be how long the economy appeared to need support in the short term.
