The Reserve Bank has reiterated the Official Cash Rate (OCR) is likely to fall further in order to maintain economic growth and return inflation to its target of 2 percent.
Reserve Bank Governor Graeme Wheeler. Photo: RNZ / Diego Opatowski
But in a speech in Tauranga, central bank governor Graeme Wheeler warned against expecting large reductions in the OCR, which he said could only be consistent with an economy moving into recession.
The Reserve Bank estimates the economy is growing about 2.5 percent.
Mr Wheeler, who cut rates to 3 percent last week, said he expected inflation to reach 2 percent by the middle of next year.
He also said the dollar was still too high given weakening dairy prices and expectations the current account deficit would continue to widen.
The dollar rose more than a cent on the news, to 67.4 cents.
ASB bank chief economist Nick Tuffley said he still expected the rate to eventually fall to 2.5 percent.
"The speech today ... did give a bit of a warning to those people who have been getting a bit carried away and predicting that the OCR could go as low as 2 percent," he said.
Employers and Manufacturers Association (Northern) chief executive Kim Campbell said the economy was already benefiting from falling interest rates.
"By keeping our interest rates appropriate, it means that we remain competitive," he said.
"And you only need to look at our trade figures, with the softening of the dollar against the lower exchange rate, the rest of the export economy has responded tremendously, and you're seeing almost immediate back-filling in the lost dairy income."