×

NZ central bank cuts rates, sees more easing ahead

New Zealand's central bank cut its benchmark interest rate on Thursday to counter headwinds posed by tumbling dairy prices and stubbornly low inflation, and said more easing was coming due to a weakening economic outlook.

The Reserve Bank of New Zealand cut its official cash rate (OCR) by 25 basis points to 3.0 percent, delivering its second cut in as many months and sending the domestic currency sharply higher.

"A reduction in the OCR is warranted by the softening in the economic outlook and low inflation," RBNZ Governor Graeme Wheeler said in a statement. "At this point, some further easing seems likely."

All 14 economists polled by Reuters had expected the RBNZ to cut its benchmark rate to 3.0 percent, and most expect more cuts before the end of the year.

Financial markets had fully priced in 25 basis points' worth of easing along with a small chance of a bigger cut, while 67 basis points of cuts are priced in over the next 12 months.

The RBNZ said that its growth outlook had deteriorated from its last policy statement in June as earthquake rebuilding activity in the Canterbury region appeared to have peaked, while prices for dairy exports had fallen sharply.

While acknowledging that the New Zealand dollar had declined "significantly" since April, the central bank said that a further fall was needed given weaker commodity export prices.

The RBNZ said that inflation remained low due to currency strength earlier in the year and lower global oil prices, adding that it expected annual inflation to return close to its target in early 2016, although it was uncertain when the weaker exchange rate would translate into higher prices.

Read MoreSmall country, big problems—New Zealand dollar tanks

"So I see 25 basis-point cut next meeting and probably 25 (bps) again in October," said Deutsche Bank chief economist Darren Gibbs.

"There's no signs of panic hence why they didn't do 50 (bps) today, but reacting to data as it comes through."

The central bank's latest move comes a year after it raised rates to a five-year high of 3.5 percent during a monetary tightening cycle in which rates rose by a total of 100 basis points.

The RBNZ's latest easing cycle comes as the economy has started to feel the pinch of a slowdown in China, which has drastically cut back its demand for dairy products, New Zealand's biggest export earner.

Global dairy prices have fallen nearly 20 percent in the past month alone to plumb a 12-1/2-year low, while domestic inflation is running at an annual 0.3 percent rate - well below the midpoint of the RBNZ's 1-3 percent target range over the medium term.

After posting an enviable 3.0 percent-plus growth rate through the end of 2014, growth slowed to an annual 2.6 percent in the first quarter, and the threat of more weakness has knocked both business and consumer confidence to three-year lows.