Reserve Bank Governor Alan Bollard commented that "more unpleasant international news has emerged since the June monetary policy statement, and there is a risk that the domestic economy will slow further.
Moreover, the cost of funds raised abroad by banks has been rising in recent months as the international financial situation has deteriorated. Today's cut will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households.
"Recent oil and food price increases mean that annual CPI inflation should peak around 5% in the September quarter of this year. However, we expect that inflation will return inside the target band in the medium term.
The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.
"Economic activity is likely to remain weak over the remainder of 2008. The ongoing correction in the housing market, together with the very high oil prices, will limit household spending and constrain the extent of recovery.
However, high export prices and an expansionary fiscal policy are expected to contribute to a gradual pickup in activity through 2009.
"Consistent with the policy targets agreement, the Bank's focus will remain on medium-term inflation. In this regard, it is important to note that monetary policy has been reasonably tight for some time, and is now restraining activity and medium-term inflation pressures.
Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the OCR further."
