New Zealand's central bank cut the official interest rate by a record 1.5 percentage points on Thursday to tackle the fallout from the global financial crisis.
Reserve Bank of New Zealand Governor Alan Bollard said the cut in the official cash rate to a five year low of 5.00 percent was largely prompted by "ongoing financial market turmoil and the marked deterioration in the outlook for global growth."
"Activity in most of our trading partners is now expected to contract or grow only very slowly over the next few quarters," Bollard said.
"Economic activity in New Zealand will be further constrained as a result, compared with our view in October."
The latest cut - the largest since the official cash rate was introduced in 1999 - followed a 1.00 percentage point cut at its last review six weeks ago, and the official rate has fallen 3.25 percentage points since July.
New Zealand's economy fell into recession in the first half of this year and most economists do not expect any recovery to start until the second half of next year.
"Balancing the various risks around the outlook, we assess some further, but significantly smaller, reductions in interest rates may be warranted beyond the current policy decision," the central bank said.
The economy was expected to have contracted further in the September quarter, following two negative quarters earlier in the year, and further contractions were possible in early 2009, the central bank said.
Unemployment is expected to rise in the coming year to around six percent from current levels of 4.2 percent, and improve only slowly.
Inflation hit an annual rate of 5.1 percent in the September quarter, underpinned by high petrol and food price inflation, but the central bank is mandated to keep it within a one to three percent band over the medium term.
The bank expects inflation to fall away quickly due to recent falls in oil prices and the impact of the global economic slowdown.
Bollard said inflation is expected to return within the target band some time in the first half of next year and remain there in the medium term.
