(Adds new comment, updates market reaction, background)
By Mantik Kusjanto
WELLINGTON, Jan 29 (Reuters) - New Zealand's central bank slashed interest rates sharply to a record-low, but pointed to less dramatic moves ahead, hoping that a raft of global stimulus packages could help revive an economy facing its worst recession on record.
The Reserve Bank of New Zealand cut its benchmark rate by 150 basis points to 3.5 percent, and said further cuts would depend on the health of the world economy. The New Zealand dollar lost 2 percent on the news.
"We would expect any further reductions to be smaller than those seen recently," Governor Alan Bollard told reporters after the central bank delivered its second large cut in as many months, and the fifth since last July.
He said large stimulus packages in countries from the United States to Japan could help bring about a recovery over time although the timing and strength of a recovery was uncertain.
The rate cut, at the top end of analysts' expectations, came after the U.S. Federal Reserve on Wednesday held its main interest rate in a range from zero to 0.25 percent and said it could stay unusually low for some time as it battles the worst recession since World War Two.
Separately, the International Monetary Fund chopped its 2009 forecast for world economic growth to a slight 0.5 percent, the weakest since World War Two, from a November estimate of 2.2 percent.
Analysts said the RBNZ's progressively bigger cuts since last year -- the so-called frontloading -- had been aimed at combating recession and cushion the impact of the global turmoil.
"The aggressive move pre-empts a lot of the downside risk to the economic outlook," said ASB Bank Chief Economist Nick Tuffley.
DOWNTURN, DROUGHT & DEBT
New Zealand is the world's biggest dairy exporter and farming forms the backbone of the $95 billion economy.
Since weathering the Asian economic downturn and drought in 1997/98, the economy had its strongest period of growth in three decades thanks partly to soaring commodity prices and debt-fueled consumer spending.
But growth has slowed as the previously hot housing market stalled, skyrocketing fuel and food prices turned consumers cautious, and the credit crunch hit.
The New Zealand dollar fell around 2 percent to a low of $0.5190 after the rate decision, but partly recovered to sit around $0.5200. The yield on the March bank bill contract fell 32 basis points to 3.18 percent.
The cut put the cash rate at its lowest level since it was introduced in 1999 and comes as New Zealand's economy shrank in the first three quarters of last year -- the first recession in a decade.
The RBNZ said the world economy was effectively in recession and that was hitting New Zealand harder than previously thought.
"We're probably still in recession and we will likely be there for the first half of this year," Bollard told reporters.
Unlike the United States and Japan, where key rates have been cut to near zero to revive their economies, analysts expect more cuts to come from the RBNZ, albeit at a slower pace.
A Reuters poll after the rate cut showed eight of 14 economists expect another 50 basis point cut at the RBNZ's March 12 monetary review. Three each picked 75 and 100 basis points.
The cash rate is seen bottoming at 2.5 percent by mid-year.
NZ bank bill futures were pricing in 90-day bill yields at 2.9 percent by June, down nearly a percentage point from yields on actual 90-day bills. Futures also suggested that yields would climb back to 3.2 percent by March 2010.
Bollard declined to say how low rates could fall, but said any further reductions would be smaller than previously seen and depend on the global picture. He reiterated banks should pass on the cuts to borrowers and told consumers to show some confidence.
New Zealand's rate compares with official rates of 4.25 percent in Australia, 0.1 percent in Japan, 2.0 percent in the euro zone and 0-0.25 percent in the United States.
Separately, data highlighted the weak state of New Zealand's economy with the annual trade deficit widening in December to NZ$5.62 billion from NZ$5.23 billion in November. (Editing by Jan Dahinten)