UPDATE 2-NZ central bank surprises with prolonged stable rates outlook, kiwi slides


* RBNZ keeps rates at record low of 1.75 pct

* Signals rates on hold into 2020, longer than previously forecast

* NZ dollar drops to one-month low in response (Recasts lead, adds economist quote)

WELLINGTON, Aug 9 (Reuters) - New Zealand's central bank unexpectedly committed to keep interest rates at record lows through to 2020 on disappointing economic activity, a dovish turn that caught markets off-guard and sent the local currency skidding.

The Reserve Bank of New Zealand (RBNZ) also downgraded its forecasts for 2019 gross domestic product (GDP) growth to 2.6 percent from 3.1 percent earlier as it kept its official cash rate on hold at 1.75 percent in a widely expected move.

The RBNZ sees the cash rate steady for much longer than earlier forecast, signaling stable rates until late 2020. Back in May, the central bank had projected rates at 2.0 percent by March 2020.

The dovish policy slant hurt the New Zealand dollar which fell to a one-month low of $0.6688 from Wednesday's high of $0.6723.

The shift in the RBNZ's outlook has coincided with a slowing economy and as "the risks to the growth outlook are on the downside," Governor Adrian Orr said in a short statement accompanying the policy decision.

"The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions," Orr said.

The rates outlook was significantly more dovish than financial markets had bargained for. Before Thursday's meeting, they were pricing in a full 25 basis point hike to 2.0 percent by the middle of next year.

Some economists see further slowdown in GDP growth.

"We are more worried than the RBNZ about the downward influence on consumption and dwellings investment from a further easing in net migration and the downside risks posed to business investment from low business confidence," said Paul Dales, chief economist at Capital Economics.

"The risks to our view that interest rates will stay at 1.75 percent until mid-2020 are clearly shifting and it has become more likely that rates are on hold for longer than even we think."

New Zealand's economy hit a soft patch earlier this year while business confidence has sunk to decade lows, raising concerns that a slowdown in business investment could further dent domestic activity.

The economy expanded at an annual rate of 2.7 percent in the first quarter from 2.8 percent at the end of 2017, and is below a recent peak of 3.3 percent in 2017. (Reporting by Charlotte Greenfield and John Mair in WELLINGTON, Wayne Cole and Swati Pandey in SYDNEY Editing by Sandra Maler & Shri Navaratnam)