Wellington  - New Zealand's central bank cut its benchmark interest rate from 8 per cent to 7.5 per cent on Thursday, its second drop in seven weeks after making no reductions for five years.

The Reserve Bank had cut its Official Cash Rate (OCR) to 8 per cent on July 24 after keeping it at 8.25 per cent - one of the highest in the developed world - for 12 months, in a bid to contain inflation within its target range of 1 to 3 per cent.

Bank governor Alan Bollard said the economy was experiencing a marked slowdown, led primarily by the household sector and the outlook for the global economy had deteriorated further in the wake of continued financial market turmoil.

He said the business sector was also coming under pressure from rising costs and falling demand. "While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below-average growth."

Bollard said the weakness in economic activity was expected to lower inflation pressures in the medium term, with headline inflation likely to peak around 5 per cent in the current September quarter, before trending down.

Rising food prices, exchange rate depreciation and higher wage costs would keep headline inflation at elevated levels through 2009, he said, but with medium-term inflation pressures expected to ease, it was appropriate to move towards a less restrictive monetary policy stance. (dpa)