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New Zealand dollar tumbles after big base rate cut; further easing possible

The Reserve Bank of New Zealand surprised markets with a larger-than-expected rate cut Aug. 7, and analysts believe that another rate cut could be in store for early 2020 amid growing trade tensions.

The central bank slashed its base rate by 50 basis points to a new record low of 1%, saying the move would help meet its inflation and employment targets.

Markets were largely expecting the central bank to trim the official cash rate by 25 basis points. The country previously reduced the official cash rate by 25 basis points to 1.50% in May, the first rate cut since November 2016.

The New Zealand dollar fell 1.8% against its U.S. counterpart around 2:18 a.m. ET.

The latest rate cut comes at a time when central banks around the world are injecting additional monetary stimulus as global trade fears continue to grow, weighing on global growth.

Some of the central bank's Monetary Policy Committee members believe that even with additional monetary stimulus, heightened policy uncertainty could mean that global growth would continue to decline.

Central bank Governor Adrian Orr hinted at the possibility of further monetary policy easing and rates going negative, if needed, Bloomberg News reported.

Robert Carnell, ING chief economist and head of research, Asia-Pacific, said trade uncertainty may weigh on New Zealand's business investment decisions, leading to a weaker second-quarter GDP print, which would merit another 25-basis-point rate cut.

"Heightened global uncertainty was reducing investment and suppressing trading-partner growth," the Monetary Policy Committee said. "This highlighted the risk of a larger or more prolonged slowdown in global economic growth."

Ben Udy, Australia and New Zealand economist at Capital Economics, also expects the central bank to cut the rate further to 0.75% in February, as the U.S.-China trade war is likely to intensify further.

The central bank said inflation remained in their target range but below the 2% midpoint, while employment was around its "maximum sustainable level." It said GDP growth headwinds were on the rise.

"In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets," the central bank said.