New Zealand's central bank stunned markets by cutting interest rates a steep 50 basis points and even flagged the risk of going nuclear by taking rates below zero, a radical shift that drove its currency to three-and-a-half year lows.
Seemingly trying to get ahead of policy easings in the United States and Australia, the Reserve Bank of New Zealand slashed its official cash rate to a record trough of 1% and opened the door to truly drastic action.
"It is easily within the realms of possibility that we might have to use negative interest rates," RBNZ Governor Adrian Orr told a news conference after its policy meeting.
Markets, which had predicted a 25-basis point cut after a similar sized reduction in May, had not even dreamed that such a move would be needed barring a global recession or a natural disaster, and the impact was immediate.
The kiwi dollar tumbled 2% to $0.6378, its lowest since early 2016 and the steepest daily decline in a year. Yields on two-year bonds sank to just 0.81% as investors priced in the prospect of at least one more rate cut.
Minutes of the RBNZ's meeting highlighted how alarmed they had become by the recent escalation in the Sino-US trade dispute, fearing its deadening impact on investment and growth.
The committee drove home its dovish message by predicting there was no chance of a hike until late 2021, a lower for longer outlook that was also recently adopted by the Reserve Bank of Australia.
"This was a stunning decision," said Westpac's NZ chief economist Dominick Stephens, noting rates had been cut by 50 basis points or more on only three other occasions. Indeed, the RBNZ last cut by 50bps in 2011 after a devastating earthquake in the city of Christchurch.
"The RBNZ appears to be trying to get ahead of the curve," he added. "Given its clear willingness to reduce rates, and our view that there is some further economic softness to come in the near term, we now expect another 25bp cut in November."
Growth in New Zealand's near $200 billion economy has been running below-par in recent quarters as international trade frictions slowed global demand in a blow to factory activity and exports. Business and consumer confidence have also sunk, painting a gloomy outlook.