The Reserve Bank has slashed interest rates to an all-time low, in a bid to fend off the risk of deflation.

In one of the few surprise decisions in recent years, governor Graeme Wheeler lowered the benchmark official cash rate (OCR) – which directly affects interest rates on mortgages and the returns on savings accounts – to 2.25 per cent, a fall of 25 basis points.

Wheeler said the decision to lower the OCR was made on Friday, before the latest cut in Fonterra’s payout forecast.

The cut would appear to be good news for borrowers,  but banks have warned that the cost of international funding has been rising in recent months amid global volatility.