WELLINGTON New Zealand's central bank cut rates for a third time in four months on Wednesday and flagged more substantial easing, including a likely half percentage point reduction in February, as inflation moderated to around the bank's target.

The Reserve Bank of New Zealand (RBNZ) lowered the cash rate by half a percentage point to 4.25%, as expected by most economists in a Reuters poll.

RBNZ governor Adrian Orr said there had been little discussion on cutting by anything other than 50 basis points (bps), a reality check for some in the market who had expected more, but signalled the likelihood of further loosening next year.

"Even with 50 basis points, we remain somewhat restrictive. There's significant output gap, significant spare capacity, so 50 (bps) felt right," he said at a news conference.

He added that the bank's forward projection for the February meeting was consistent with a further 50 bps cut.

The New Zealand dollar and short-end interest rates initially rose after the decision, which hit some in the market that had expected a larger 75-bps cut.

However, those gains partly disappeared, as investor focus shifted back to the governor's dovish comments.

Analysts broadly expect the central bank to cut by at least 25bps in February, but note there is a lot to happen before the next meeting.

"The RBNZ has left the doors wide open for its future moves, with no attempts to temper market expectations for the pace of future cuts," ASB chief economist Nick Tuffley said.

"It is also now a three-month gap until the RBNZ next meets, with a full cycle of quarterly domestic data and President (Donald) Trump’s inauguration in between," he said.

Orr said they expect to reach a neutral rate by the end of 2025, which he put at around 2.5% to 3.5%. The neutral rate is considered neither accommodative, nor restrictive for the economy.

Most of the major retail banks in New Zealand cut their interest rates, following the announcement.

Kiwibank chief economist Jarrod Kerr said while they expect the central bank to cut by just 25 bps in February, they saw scope for more easing later on.

"We believe rates need to be cut lower than the RBNZ's 2025 forecast track, to stimulate an economy struggling to get out of recession," he said.

The central bank noted that economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending. Employment growth is expected to remain weak until mid-2025, and for some, financial stress will take time to ease.

New Zealand is one of several central banks around the globe that have started cutting rates, as inflation has moved lower. Neighbouring Australia, however, is an outlier to the broad easing trend, with cuts not expected until the first half of next year.

  - Reuters