The Reserve Bank has cut the Official Cash Rate to 1.5% from 1.75%.

The OCR was last changed in November 2016.

This was the first decision to have been made under the auspices of the new seven-strong Monetary Policy Committee, which includes three people from outside of the RBNZ, though is chaired by RBNZ Governor Adrian Orr. The committee reached a "unanimous" decision to cut the rates.

Banks were quick off the mark to react to the change with the ANZ and Kiwibank quickly announcing cuts to both lending and deposit rates.

The Kiwi dollar, which was changing hands at just over US66c prior to the announcement, fell to about US65.7c afterwards.

The latest Monetary Policy Statement released by the RBNZ on Wednesday shows a markedly different trajectory for interest rates compared with the previous MPS released in February.

The latest MPS indicates the possibility, but not certainty of a second OCR cut by early next year. The forecast now sees the OCR bottoming at 1.4% before climbing back up to 1.9% by mid-2022.

The February MPS forecast no cuts and had the OCR rising to 2.4% by early 2022.

What the economists say

Westpac chief economist Dominick Stephens said his interpretation was that the RBNZ is "genuinely open minded" about whether to cut the OCR again or not.

"We judge the probability of a follow-up OCR cut in June as low. August is more of a live possibility, but our current forecast is that the RBNZ will keep the OCR on hold at 1.5% until mid-2020, when it will reduce the OCR again."

Stephens noted that the OCR cut had caused the Kiwi dollar to fall, while two year swap interest rates felll 15 basis points.

"Mortgage rates have plunged over the past two months, and today’s OCR cut will cause them to fall further. We think the consequence will be an upturn in the housing market, starting in the second half of 2019."

ASB chief economist Nick Tuffley said the next move in the OCR will likely be "data dependent".

"We have pencilled in August but feel the risks are skewed to a later move. The RBNZ’s current OCR outlook suggests a measured assessment before a further cut rather than a sense of urgency.

"We do not see inflation sustaining around the 2% target mid-point without getting further stimulus. Moreover, employment growth has slowed, creating a growing risk that the RBNZ may not achieve its maximum sustainable employment objective."

'RBNZ stopped short'

ANZ chief economist Sharon Zollner noted the RBNZ "stopped short of promising further aggressive action".

"We have long argued that the RBNZ would cut the OCR, but in the end they have taken the plunge a little earlier than we anticipated."

She said “one and done” [one cut and then no more] would be "a very unusual cutting cycle".

"It could happen, since the RBNZ has acted more proactively than has historically been the case, but we continue to forecast that this is just the start of a sequence of three cuts.

"Given the magnitude of the downward revision to the RBNZ’s Q1 growth outlook, the hurdle for near-term further disappointment is high, but the RBNZ’s growth forecasts further out are considerably higher than our own.

"Lower interest rates will support growth, but too-high interest rates are not this economy’s problem at present. We therefore forecast that by November the ducks will have lined up for another cut, followed by one in February. In our view deterioration in global conditions is the primary risk that could bring this forward."

'Lower rates won't generate inflation'

BNZ's head of research Stephen Toplis said while he understands the logic behind the RBNZ’s decision, "our biggest concern remains that lower interest rates will not generate the inflation that the RBNZ so badly wants to see".

"Indeed, even Governor Orr, in his press conference, noted that the lack of inflation was a global phenomenon. This being so, it is unlikely New Zealand will be able to create inflation when no one else can. The absence of inflation is bothering central banks the world over.

"We again warn that, provided low inflation is not indicative of weak economic conditions but reflects structural change, central banks should not be concerned by this development. There is a very real risk in the current approach that when economies inevitably turn down monetary authorities will have exhausted the ability of interest rates to provide the impetus that might, at that stage, be so desperately needed."

Kiwibank chief economist Jarrod Kerr and senior economist Jeremy Couchman say the RBNZ will monitor how much of the 25bp cut is passed on to borrowers and savers.

"If not all of the 25bps are passed on, the chance of another cut increases," they say..

"The key takeaway for financial markets is interest rates will likely fall further and hold in an even lower for longer range. And we continue to expect a volatile descent in the Kiwi dollar.".

This is the RBNZ Governor's statement:

Tena koutou katoa, welcome all. The Official Cash Rate (OCR) has been reduced to 1.5 percent. The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit. Global economic growth has slowed since mid-2018, easing demand for New Zealand’s goods and services. This lower global growth has prompted foreign central banks to ease their monetary policy stances, supporting growth prospects. However, there is uncertainty about the global economic outlook. Trade concerns remain, while some other indicators suggest trading-partner growth is stabilising. Domestic growth slowed from the second half of 2018. Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending. Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment. Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly. Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates. Meitaki, thanks.

As promised the RBNZ also immediately provided a summary of the MPC meeting.

Record of Meeting: