UPDATE 2-New Zealand slashes rates to 5-year low, flags more

(Updates with poll, quotes, market reaction)

By Gyles Beckford

WELLINGTON, Dec 4 (Reuters) - New Zealand's central bank slashed interest rates by a record 150 basis points because of financial market turmoil and a markedly weaker economy and said it may cut further to speed the move out of recession.

Thursday's cut, the Reserve Bank of New Zealand's fourth since July, took the official cash rate to a five-year low of 5.0 percent. Economists said the bank was not finished yet.

"The big moves are now behind us but we still see another 50 point reduction in January," said Bank of NZ head of research Stephen Toplis.

A Reuters poll taken after the decision showed 10 of 17 economists expected a 50 basis point cut in January, with five picking 75 basis points and two picking 1 percentage point.

The cash rate is seen at a low of 3.5 percent by mid-2009 below the path indicated by the central bank's own forecast for wholesale interest rates.

Financial markets had priced in the large cut and reaction was muted. The New Zealand dollar briefly dipped after the move, before it was boosted by stronger stock markets.

EXPANSIONARY POLICY

RBNZ Governor Alan Bollard said monetary policy was now expansionary, although economic and inflation risks were to the downside.

"Some further, but significantly smaller, reductions in interest rates may be warranted," he said in a statement.

The governor said he was optimistic about the economy's prospects and that it was probably already out of what has been a shallow recession.

"We have positive but very low growth for the next four quarters, and it's only towards the second half of next year that one can be sure we're getting very solid growth," Bollard said.

The RBNZ has forecast the economy to grow 0.1 percent in the year to March 2009, rising to 1.3 percent in 2010 and 4.3 percent in 2011.

New Zealand has been in recession since the beginning of the year, its first in more than a decade, but Bollard said "considerable slack" was now building in the economy, although he noted the uncertainty surrounding the local and global economic outlook.

Economists said the RBNZ was being too optimistic, and the world economy was set to get worse, which would limit New Zealand's recovery.

"We expect the next 6-9 months to be the period of peak weakness in the current economic recession," said Shamubeel Eaqub of Goldman Sachs JBWere.

The lacklustre economy, along with lower commodity prices, would help bring inflation back within the bank's target 1-3 percent target band by the first quarter of 2009.

The annual inflation rate hit an 18-year high of 5.1 percent in the third quarter on higher food and oil prices, but the RBNZ is now projecting it to bottom out at 1.6 percent by the third quarter of 2009.

World financial markets were expected to start acting more normally next year, with the global economy also showing signs of recovery.

Banks and other lenders were expected to pass on the lower lending costs to their customers (Editing by Jan Dahinten)