* What: New Zealand central bank interest rate decision
* When: Thursday, April 30, 9 a.m. (Wednesday, 2100 GMT)
* Central bank seen cutting rates by 50 bps to record low
By Mantik Kusjanto
WELLINGTON, April 27 (Reuters) - New Zealand's central bank is expected to cut its key interest rate to a record low of 2.5 percent on Thursday and will signal that rates will stay low for longer to combat a deepening recession, a Reuters poll shows.
Most economists' are picking a 50 basis point cut in the official cash rate (OCR) because of New Zealand's weak economic fundamentals, but there are also arguments in favour of a smaller quarter-percentage point cut.
"There is a strong economic case for a 50 basis point cut," said Westpac chief economist Brendan O'Donovan.
"But tactical considerations could make it a much closer call between 25 and 50 basis points".
Twelve of 15 economists in the latest Reuters poll predict the Reserve Bank of New Zealand (RBNZ) to cut the OCR by half a percentage point on April 30, while three expecting a 25 basis point cut.
Expectations for the sharper cut have hardened from March after an influential survey this month pointed to a prolonged and deep recession.
While the country is in its deepest recession on record, over-eager investors are already pricing in higher rates for next year, forcing up borrowing costs that could delay a recovery. That is putting pressure on the bank to ease policy more forcefully, either by cutting rates or by managing market expectations verbally.
Markets are now pricing in a more than 60 percent chance of a 50 basis point cut, and a nearly 40 percent probability of a quarter percentage point cut.
A TURNING POINT?
Deutsche Bank Chief Economist Darren Gibbs, who favours a quarter percentage point cut, said the economy has sufficient monetary and fiscal stimulus in the pipeline to return to a growth track by year end.
"We are observing clear signs of a meaningful recovery in housing market activity and some tentative signs of a turn higher in consumer confidence."
The housing market showed signs of bottoming out in March, with prices and sales rising for a second consecutive month, but other economic surveys have remained grim.
New Zealand has been in recession since the beginning of 2008, the longest contraction in more than 30 years, and the downturn is expected to last through much of this year.
The RBNZ has cut its key rate by a total of 525 basis points since last July to revive the $100 billion economy.
In March, RBNZ Governor Alan Bollard said further, smaller cuts to around 2.5 percent were possible, but said he would be reluctant to go too much lower because of the need to offer relatively attractive yields to investors.
That had the perverse effect of sending interest rate swaps and the currency higher as traders started to factor in a start to higher rates, undermining the RBNZ's easing policy.
"Such tightening ... is clearly at odds with the RBNZ's monetary policy outlook, particularly with a jump in the currency as well," said ANZ-National Bank chief economist Cameron Bagrie.
"We expect the RBNZ...to reiterate that rates are set to remain low for an extended period."
On April 1, the RBNZ was forced to say that longer-term interest rates would remain low for a prolonged period, after a rush in consumer demand to refinance home loans at cheap rates forced banks to hedge their exposure, causing swap rates to spike.
Interest rate swap rates have since retreated, but swap yields were still about 40 basis points higher than in March. (Editing by Jan Dahinten)