The Reserve Bank is set to cut its cash rate next month to a record low and may deliver further cuts later in the year, to counter risks to economic growth, low inflation and a high dollar.
The central bank this morning gave a clear signal of lower interest rates, which knocked the New Zealand dollar almost 1 percent lower.
"At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range," Reserve Bank Governor Graeme Wheeler said in an unscheduled economic update.
Read the full economic update here
Graeme Wheeler took aim at the high value of the New Zealand dollar. Photo: RNZ / Rebekah Parsons-King
Mr Wheeler said the domestic economy was being underpinned by strong immigration gains, building activity, and tourism, but there were significant downside risks around the world, including Britain's planned exit from the European Union.
But the high value of the New Zealand dollar, which is 6 percent higher than the bank forecast in June, was also targeted for the impact on exporters and the dampening effect on inflation.
"This makes it difficult for the Bank to meet its inflation objective," he said. "A decline in the exchange rate is needed."
The New Zealand dollar fell to a six-week low of US69.54 cents from US70.2 cents before trimming its losses. Wholesale interest rates also eased slightly.
Mr Wheeler reiterated the bank's concern about the hot housing market, which prompted the RBNZ to signal tighter mortgage lending rules for the property sector earlier this week.
The Reserve Bank's statement was seen as cementing a rate cut at its 11 August monetary policy statement.
"The RBNZ's statement reinforces our view that the RBNZ will cut the OCR to 2 percent in August, then cut again to 1.75 percent in November," said ASB Bank senior economist Jane Turner.
The statement was also regarded as reasserting the RBNZ accepted its primary role was to get inflation back to the 2 percent mid-point of its target band.
Analysts had previously thought the central bank was reluctant to cut interest rates because it might further inflame house prices.
Earlier this week, official data showed consumer prices rising 0.4 percent in the three months to June, with the annual rate at the same level. Inflation has been outside of the RBNZ's 1-3 percent band for nearly two years.
Kiwibank senior economist Zoe Wallis said the rate cut next month was a done deal, and more would be needed.
"So that will take us down to 2 percent, beyond there what we are actually looking at is - we are now calling for an additonal 50 basis points worth of easing, so we think the terminal rate on the OCR is now likely to end up closer to around 1.50 [percent]."
Critics have argued lower interest rates would stoke an already heated housing market.
But the central bank will be hoping its plans to impose further lending restrictions on investors will curb the price growth.
