The Reserve Bank (RBNZ) has delivered the widely expected half a percentage point (50 basis points) cut to the official cash rate (OCR) to a two year low of 3.75 percent, but signalled it will be more cautious with further reductions.
It was the third consecutive big-sized cut and had been signalled by the central bank last year.
"The economic outlook remains consistent with inflation remaining in the band over the medium term, giving the Committee confidence to continue lowering the OCR," the Monetary policy Committee said in a statement.
It was cautious about the speed and size of future rate cuts.
An indicative forecast in the monetary statement suggested a slower rate of cuts this year year with the cash rate falling to around 3 percent by the end of next year.
Economists had overwhelmingly forecast the big cut as the economy remained weak, households and businesses kept tight control on spending and investment, and the unemployment rate kept rising.
The RBNZ acknowledged the weak state of the economy, with rising unemployment, subdued household spending and investment, but said there were signs of improvement with inflation was in its 1 to 3 percent target band.
"Economic growth is expected to recover during 2025. Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions."
It said it expected the economy to continue to recover gradually, with the labour market improving in the second half of the year, while it expected inflation to remain in the target band.
"If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025."
The MPC said external risks from geopolitical tensions and political uncertainty could stoke economic and inflation volatility.
Several retail banks - ASB, BNZ, Westpac, Kiwibank, Co-op Bank - immediately dropped their floating or variable lending rates, but only Westpac shaved a little off fixed term rates, which most mortgage borrowers are on.
Finance Minister Nicola Willis said it was good news, and pointed to the bank saying there could be further reductions, as well as employment picking up, in the second half of the year.
The Green Party's co-leader Chloe Swarbrick said the change was good news for people with a mortgage but said the government had inflicted pain on the economy through cuts to jobs and public services.
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