Reserve Bank governor Graeme Wheeler surprised no-one with his much-anticipated cut in the OCR, but the question now is how much further is he prepared to go to ensure the economy does not go into a recession.
There are pundits now lining up to say the OCR was likely to go below 2.5% either late this year or early next, while others have their doubts.
Global factors, the New Zealand dairy industry and now weather patterns will all play a part in the decisions made by the central bank over the next few months. The El Nino weather pattern will affect farming production.
In a statement, Mr Wheeler said global economic growth remained moderate, but the outlook had been revised down due mainly to weaker activity in the developing economies.
Concerns about softer growth, particularly in China and East Asia, had led to elevated volatility in financial markets and renewed falls in commodity prices.
The United States economy continued to expand. Financial markets remained uncertain as to the timing and impact of an expected tightening in the US monetary policy.
''Domestically, the economy is adjusting to the sharp decline in export prices and the consequent fall in the exchange rate. Activity has also slowed due to the plateauing of construction activity in Canterbury and a weakening in business and confidence.''
The economy was now growing at an annual rate of about 2%, he said.
However, Mr Wheeler did not overlook the good parts of the economy, including robust tourism, strong net immigration, ongoing construction activity in Auckland and other regions and the lower interest rates and the depreciation of the dollar.
Lower exchange rates supported the export and import-competing sectors, but further depreciation was appropriate given the sharpness of the decline in New Zealand's export commodity prices, he said.
''A reduction in the OCR is warranted by the softening in the economy and the need to keep future average CPI inflation near the 2% target midpoint. At this stage, some further easing in the OCR seems likely,'' Mr Wheeler said.
ANZ chief economist Cameron Bagrie said the Reserve Bank's commentary and projections were more dovish than he had expected after forecasting a more balanced tone.
The 90-day bank bills implicitly implied the OCR would be cut once more.
''The rationale is clear. The Reserve Bank feels the easing in monetary conditions to date is insufficient to get inflation back to its target midpoint in an acceptable timeframe.
"Growth is below trend, the full impact of the lower terms of trade is yet to be felt, the output gap is slightly negative, spare capacity is growing and inflation pressures are low.''
Mr Bagrie was forecasting another cut in the OCR down the track, but he expected a temporary improvement in the tenor of the data flow to stave off an October move. Yesterday's Real Estate Institute data was a case in point.
BNZ research economist Stephen Toplis still thought the next cut in interest rates would be next month but his confidence in that call had been diminished.
''Our formal call for the cash rate to trough at 2.5% also remains unchanged but we think the detail of the Monetary Policy Statement heightens the probability rates will fall below this level.''
At a glance
• Reserve Bank cuts OCR 0.25% to 2.75%.
• Some retail banks cut their floating rates by 0.25%.
• More rate cuts are promised.
• 65% chance of an October cut.
