Reserve Bank governor Graeme Wheeler singled out low inflation data as prompting the surprise 25 basis point cut.
‘‘This is one factor requiring lower interest rates,'' he said in his monetary policy statement yesterday.
"As inflation picks up, the dampening influence of inflation expectations on wages and prices is expected to fade,'' Mr Wheeler said.
The New Zealand dollar immediately took a hit of more than US1c, weakening from around US67.80 down to US66.65 after the cut. Similarly, against the Australian, it dropped from A90.60 to A88.80.
Overseas holidays and importing goods just more expensive.
The impending crisis in the debt-laden dairy sector had Federated Farmers hoping for a cut earlier this week, and its spokesman Dr William Rolleston said yesterday it was now up to banks to pass on the cut to mortgage holders.
‘‘Farmers' cash flow is tight at the moment, particularly in the dairy sector, and anything that can ease the pressure on their bottom line will help get as many dairy farmers as possible, through the current season,'' Dr Rolleston said.
Bank economists are picking further cuts, in June, unless economic data continues to come in below the Reserve Bank's expectations, and April could become the next cut date.
Mr Wheeler said the outlook for global growth had deteriorated since the December monetary policy statement, due to weaker growth in China and other emerging markets, and slower European growth.
‘‘This is despite extraordinary monetary accommodation, and further declines in interest rates in several countries. Financial market volatility has increased, reflected in higher credit spreads. Commodity prices remain low,'' he said.
He said domestically, the dairy sector faced difficult challenges, but domestic growth was expected to be supported by strong inward migration, tourism, a pipeline of construction activity and accommodative monetary policy.
ASB senior economist Jane Turner said the Reserve Bank had emphasised the decline in inflation expectations, and it would wait for more data before making its next move.
Westpac's senior economist Dominick Stephens said the key reasons for yesterday's cut was the worsening international economic environment, and recent decline in New Zealand inflation expectations.
He said it appeared the next OCR cut would be in June.
Labour and the Green Party welcomed the cut, and called for the Government to work closer with the Reserve Bank, especially when it came to containing the heated Auckland housing market.
Labour's Finance spokesperson Grant Robertson said yesterday's cut showed National needed to step up and support the Reserve Bank to ensure the country was able to handle ‘‘the increasing risks to the economy''.
He said Governor Wheeler had identified just four areas driving the economy; inward migration, tourism, a pipeline of construction activity and now accommodative monetary policy.
‘‘These are short-term and out of the Government's control,'' Mr Robertson said.
‘‘The domestic risks of serious weaknesses in the dairy sector and pressures in the housing market have been a feature of Reserve Bank announcements for a long time now. The Government hasn't been able to do anything to address this,'' he said.
Green Party finance spokesperson Julie Anne Genter said the Government's failure to take the heat out of the Auckland housing market meant risks remained for further house price increases.
‘‘We welcome the long overdue decision to lower the OCR, which will be a relief to indebted dairy farmers and households paying off their mortgages,'' she said.
National needed to be working in tandem with the Reserve Bank by introducing complementary measures to contain house price inflation, instead of leaving it all up to the Reserve Bank to manage.
‘‘New Zealand households and businesses will benefit from interest rate cuts, but lower rates will mean higher risks of house prices inflating further,'' Ms Genter said.
The responsible policy would be a comprehensive capital gains tax, excluding the family home, to remove the unfair tax incentive to invest in property.
‘‘Treasury has been telling the Government this has been needed since 2010,'' she said.
