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NEW Zealand's economy is predicted to remain fairly strong for the next two years, with inflation staying low.
This was the view of the Reserve Bank after it announced a cut of a quarter of a per cent in interest rates.
This took the official interest rate to 6.25 per cent, down from 6.5 per cent.
The Reserve Bank move was described by the bank's governor as an insurance premium against the slowing world economy.
However, after announcing the country's first rate cut since December 1998, Reserve Bank governor Don Brash warned the move could be a one-off.
"It has been a finely balanced decision between trying to quell inflationary pressures and hedging against a slowdown in the world economy," he said.
Reserve Bank figures put inflation at 4 per cent in the year to December. A 12-year low in unemployment and some sectors of the economy running at close to full capacity posed further inflationary pressure.
But Dr Brash said the bank believed inflation would quickly fall below 4 per cent.
"The risk that the world economy slows by more than assumed in our current projection - with a consequential material reduction in inflation pressures in the New Zealand economy - seems the marginally bigger risk," Dr Brash said.
"The reduction in the official cash rate may be seen as an insurance premium against that risk.
"Bank of New Zealand chief economist Tony Alexander predicted a further rate cut of at least a quarter of a percentage point in May as the world economy continued to cool.
But he said New Zealand would be shielded from the worst of the downturn.
"We have had consumer and business confidence increase very strongly in the past year,"
he said. "But most significantly, we have had a boom in the export sector going on, courtesy of the drop in the New Zealand dollar last year.
"The country's main exports - primary industries and tourism - are unlikely to be badly hit by the worsening economic situation outside New Zealand."
The Reserve Bank has predicted economic growth of 2.5 per cent this year.