News: UPDATE 1-New Zealand central bank cuts rates to record low of 2.25 pct

(Adds detail, central bank and analyst comment and market reaction)

New Zealand's central bank took markets by surprise on Thursday, cutting interest rates to a record low of 2.25 percent and signalling more cuts may be needed after the outlook for global growth weakened.

The Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate by 25 basis points to 2.25 percent, citing a material decline in a range of inflation expectation measures.

"Monetary policy will continue to be accommodative," RBNZ Governor Graeme Wheeler said in a statement. "Further policy easing may be required to ensure that future average inflation settles near the middle of the target range."

The RBNZ is mandated to keep annual inflation in a 1 percent to 3 percent target range. With annual inflation currently hovering around 0.1 percent and inflation expectations at a 22-year low, the central bank opted to cut.

Of 21 economists polled by Reuters, 17 had expected the bank to hold rates steady with only four predicting the quarter percentage point cut.

"Certainly it's a surprise," said Philip Borkin, senior economist at ANZ.

"They're putting a lot of weight on (inflation expectations) ... clearly the RBNZ wanted to get in front of some of the risks that it is seeing," he said.

While long-run inflation expectations are well-anchored at 2 percent, "there has been a material decline in a range of inflation expectation measures," Wheeler said.

The central bank now expects headline inflation to return within the target band by late 2016, rather than in the current quarter.

The central bank's forecasts – reflected in its 90-day bank bill rates – point to one more rate cut to come.

The bank forecast a 90-day bank bill rate of 2.2 percent by December 2016, down from the 2.6 percent it predicted at its last meeting.

The New Zealand dollar slid as far as $0.6650 NZD=D4, from around $0.6783, after the rate decision, before recovering slightly to $0.6666.

The bank cut rates four times between June and December last year, reversing four rate hikes in 2014. Further cuts were stalled by a housing boom in Auckland that has begun to spread across the country and strong economic data.

However, the outlook for global growth has deteriorated, the domestic dairy sector faces "difficult challenges" and the New Zealand dollar is more than 4 percent higher than projected in December on a trade-weighted basis, Wheeler added.

"A decline (in the dollar) would be appropriate given the weakness in export prices," he said.

Up until recently dairy has formed the backbone of the economy, but tumbling global prices have put the sector under pressure.