The Reserve Bank has lowered its Official Cash Rate to 2.5%. It was previously 3%.
Governor Allan Bollard says the world economy deteriorated further than expected in the first quarter of 2009 and "adverse economic forces" are expected "to remain dominant" throughout 2009.
Dr Bollard said it is likely to be some time before economic activity returns to robust and healthy levels.
He expects the rate to stay at 2.5% until the end of next year, but it "could still move modestly lower."
The rate is the lowest since the Official Cash Rate was introduced on 17 March, 1999. It was then 4.5%.
On 12 March, Dr Bollard indicated he had almost finished cutting the rate and any further cuts would be small.
The OCR has been lowered in a series of cuts since 24 July 2008. It was set at 8.25% on 13 September 2007. The previous rate was set on 12 March 2009.
Bank statement
In a statement issued on Thursday, Dr Bollard said:
"Overall, developments since March point to lower medium-term inflation than previously projected.
"The main factors behind this are weaker global growth, and an unwarranted tightening in financial conditions via both higher long-term interest rates and a stronger exchange rate than expected.
"Global financial markets have showed some tentative signs of stabilisation since the March Monetary Policy Statement and governments in the major economies are continuing to make progress in resolving their banking system difficulties.
However, a large amount still needs to be done and sentiment remains fragile.
"Negative feedback from the global recession could also still adversely affect financial institutions.
"The world economy deteriorated further than expected in the first quarter of 2009.
"While monetary and fiscal policy responses in many countries have been substantial and there are some signs of stabilisation in some countries, we still expect the adverse economic forces generated by the crisis to remain dominant throughout 2009.
"The timing and extent of global recovery remain highly uncertain.
"While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak.
"Business sentiment is low, investment has been curtailed and employment reduced.
"We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing.
"This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter.
However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels.
"We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010.
"The OCR could still move modestly lower over the coming quarters."
