The Reserve Bank has opted for boldness over caution as it delivered a 50-basis-point cut to the official cash rate to 2.5%, and signalled further reductions.
It said it considered a smaller cut, but was guided by the outlook, including stronger inflation pressures, and the risk that too small a cut would further hold back the economy.
"A larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment," a summary of the Monetary Policy Committee (MPC) meeting said.
The RBNZ said it debated the upside risks to inflation, currently at 2.7%, and expected by many commentators likely to go through the top of the RBNZ's 1-3% target band.
Unlike the July decision, when two of six members voted for a 50-basis point cut, the MPC reached a consensus on the size of the rate cut.
"However, with spare capacity in the economy, inflation is expected to return to around the 2% target mid-point over the first half of 2026."
The central bank left the door open for further cuts.
"The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target mid-point in the medium term."
A closely followed business survey this week showed firms increasingly downbeat about the outlook, cutting staff and investment, while facing stronger inflation pressures, which was seen as strengthening the case for a bigger cut.
The MPC acknowledged the economy was weak as shown by the bigger than expected 0.9% contraction in activity in the three months to June
Finance Minister Nicola Willis said the rate cut would ease pressure on households and businesses.
"Today's Official Cash Rate shows monetary policy doing its job. The reduction will be welcome news to mortgage-holders and businesses, as OCR drops flow through to interest rates.
"Falling interest rates are good news for growth, jobs, and investment. It also means more money in the hands of families with mortgages."
