By Rebecca Howard and Jane Wardell
WELLINGTON (Reuters) - A weak global outlook and tepid inflation expectations pushed New Zealand's central bank to cut interest rates to a record low 2.25 percent, a move that took markets by surprise.
The Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate by 25 basis points to 2.25 percent, citing a material decline in a range of inflation expectation measures.
Of 21 economists polled by Reuters, 17 had expected the bank to hold rates steady with only four predicting the quarter-percentage- point cut.
The New Zealand dollar
The central bank also signaled at least one more rate cut to come.
"Monetary policy will continue to be accommodative," RBNZ Governor Graeme Wheeler said in a statement. "Further policy easing may be required to ensure that future average inflation settles near the middle of the target range."
The RBNZ is mandated to keep annual inflation in a 1 percent to 3 percent target range. With annual inflation currently hovering around 0.1 percent and inflation expectations at a 22-year low, the central bank opted to cut.
"The RBNZ has clearly been spooked by the recent weakening in the outlook for the global economy, the strengthening in the New Zealand dollar and the fall in domestic inflation expectations," said Paul Dales, Chief Australia & NZ Economist for Capital Economics.
Dales said there is now a "real possibility" interest rates could fall blow 2.0 percent.
While long-term inflation expectations are well anchored at 2 percent, "there has been a material decline in a range of inflation expectation measures," said RBNZ's Wheeler.
The central bank's assistant governor John McDermott told journalists Thursday's decision was "really about trying to stabilize inflation expectations."
The central bank now expects the headline inflation figure to return within the target band by late 2016, rather than in the current quarter.
The central bank's forecasts – reflected in its 90-day bank bill rates – also point to another rate cut.
The bank forecast a 90-day bank bill rate of 2.2 percent by December 2016, down from the 2.6 percent it predicted at its last meeting.
The New Zealand dollar is "likely to remain under pressure" as the market adjusts to the significant downward revision to the bank's 90-day bill projections, ANZ Bank said in a note.
The central bank cut rates four times between June and December last year, reversing four rate hikes in 2014. Further cuts were stalled by a housing boom in Auckland that has begun to spread across the country and strong economic data.
However, the outlook for global growth has deteriorated, the domestic dairy sector faces "difficult challenges" and the New Zealand dollar is more than 4 percent higher than projected in December on a trade-weighted basis, Wheeler added.
(Reporting by Rebecca Howard and Jane Wardell, editing by G Crosse)
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