The Reserve Bank of New Zealand has cut the official cash rate by 25 basis points and is signalling more cuts could be on the way.
Governor Graeme Wheeler cut the rate to 3.25 per cent - the first reduction in the rate since January 2011.
He said a more pronounced fall in export prices that began in middle of last year is a driver behind the cut.
"The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed," Mr Wheeler said.
The RBNZ has an inflation target range of between one per cent and three per cent annually.
"A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium-term inflation converges towards the middle of the target range.
"We expect further easing may be appropriate," he said.
The New Zealand dollar fell as low as 70.11 US cents, from 72.07 cents immediately before the decision was released at 9am (0700 AEST). It was recently trading at 70.57 US cents.
He said despite recent declines in the NZ dollar it remained overvalued.
"A further significant downward adjustment is justified," he said.
The bank expects the country's terms of trade will be about five per cent lower than in its March projections, primarily on the sharp decline in dairy prices.
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