"The Reserve Bank has given the market carte blanche to price in rate cuts as soon as they like," he said, after the central bank kept the official interest rate (OCR) unchanged at 8.25%.
The dollar fell about US1c and the two-year swap rate fell nearly 0.3%.
Financial markets are now pricing in a 40% chance of an OCR cut in July and a 100% chance of a cut in September, with another in October and the good chance of a third cut by the end of the year.
Mr O'Donovan expected the market to drift down further in response to ongoing weak data, punctuated by jumps in response to stronger inflation indicators.
ASB chief economist Nick Tuffley said markets needed to be cautious about overreacting to the Reserve Bank's monetary policy statement as there were still upside risks to inflation, which was expected to hit 4.7% this year - well above the 3% top of the target band.
"The market runs the risk of getting a little ahead of itself, as it did after the weak first-quarter employment figures.
"We still see the most likely window for the first OCR cut as being September through December, with September still looking conceivable."
The monetary policy fine print suggested the Reserve Bank would be cautious when it did ease, with an inclination to keep interest rates on the high side of neutral, he said.
Reserve Bank governor Alan Bollard issued a chilling economic overview yesterday, which focused on the problems facing the household sector.
The revision to a 4.7% peak for inflation was mainly because oil prices had risen by more than 30% since March to new all-time highs.
In real terms, oil prices were now above the levels experienced in the 1970s.
"Furthermore, the inflation that occurred in dairy prices in late 2007 now appears to be occurring in other food groups, such as breads and cereals.
"These significant external cost shocks are occurring at a time when underlying inflation pressures are already quite intense."
Many years of strong economic growth had caused capacity pressures - particularly in the labour market - to rise to high levels, Dr Bollard said.
That, in combination with rising inflation expectations in response to an extended period of relatively high headline inflation, had contributed to annual non-tradeable inflation running above 4% for most of the past four years.
The bank was projecting low economic growth this year and only a gradual recovery.
A weaker household sector outlook was the main reason for the downward revision, he said.
Current indicators suggested the housing market was undergoing a "significant downward correction" with sales volumes down significantly and prices starting to fall in many areas.
The combination of rising mortgage rates, oil and food prices was reducing the amount of disposable income households had for discretionary spending, Dr Bollard said.
Mr O'Donovan said the tone and forecasts in the June statement represented an even more extreme mix of weak growth and high inflation than the March statement or the OCR review in April.
Annual GDP growth was anticipated to be 1.9% in the year to March 2009 but that had now been revised down to 0.9%"We take issue with the extremely pessimistic growth outlook for the following couple of years.
The weakness is focused in consumption, though investment has also taken a hit."
Business investment was weak in response to weaker household spending, tight credit conditions, poor profitability and a weaker exchange rate making imported investment goods more costly.
Residential investment was now expected to be far weaker, but Mr O'Donovan was surprised by the size of the downward revision of about 12% over two years.
"If anything, housing market activity has been falling at a more moderate pace than looked possible a few months ago and building consents rebounded strongly in April."
