RBNZ cuts rates 25 bps to 2.0 pct, says more will be needed...

• RBNZ cuts rates 25 bps to 2.0 pct, says more will be needed
• Laments strength of NZ$ amid world of ultra-loose policy
• Market pricing in at least one more cut, send NZ$ higher anyway

(Updates to add detail from RBNZ, comment from assistant governor, market reaction)

The Reserve Bank of New Zealand cut interest rates a quarter point to a record low of 2.0 percent on Thursday and flagged the need for more cuts as it struggles to head off the dangers of deflation at home.

The central bank's policy challenges became immediately apparent after the decision with investors lifting the local dollar to a one-year peak despite the easing, threatening to depress both exports and inflation in the small open economy of 4.7 million.

"Central banks are 'reluctant cutters' as they head towards lower bounds," said Jarrod Kerr, a senior interest rate strategist at Commonwealth Bank of Australia.

"Frustrations over currency strength and inflation expectations eventually overpower policymakers because it is a global theme and a theme the RBNZ cannot escape," said Kerr, predicting rates might have to halve to 1 percent in time.

Thursday's quarter point cut from the Reserve Bank of New Zealand (RBNZ) looked like weak beer compared with the recent drastic easing from the Bank of England.

RBNZ Governor Graeme Wheeler indicated countries accounting for a quarter of the world's economic output now have negative interest rates. In such an environment, the RBNZ had to ease just to stop its currency from rising and further depress inflation, said Wheeler.

Consumer price inflation is already running at just 0.4 percent, well below the RBNZ's central target of 2 percent.

NOT NORMAL TIMES A further slowdown would risk dislodging inflation expectations and tipping the economy into the sort of deflationary spiral that has plagued Japan in recent years.

Seeking to head this off, Wheeler left the door wide open for additional stimulus.

"Our current projections and assumptions indicate that further policy easing will be required to ensure future inflation settles near the middle of the target range," he said in the bank's August policy statement.

Assistant Governor John McDermott told Reuters one more rate cut was likely with another possible. "The market has figured out appropriately that we have a big chance in November to assess where we've got to," McDermott added.

Markets have fully priced in a cut to 1.75 percent with a further cut to 1.5 percent an evens chance <0#NBB:>.

"With the focus firmly on inflation expectations, we are adding a further 50 basis points of easing into our forecasts," said Michael Turner, a strategist at RBC Capital Markets.

"Risks are skewed that more, rather than less, is ultimately delivered."

None of this stopped investors from pushing the kiwi dollar up over 1 percent to $0.7275 , underlining the almost impossible challenge the RBNZ faces.

Wheeler himself acknowledged the bank had "very limited" influence over the exchange rate in a forex market that traded trillions of dollars a day.

Indeed, he said that in more normal times New Zealand - which has solid economic growth and an overheated housing market - would be looking to hike interest rates.

But these are not normal times. "We are in the most extraordinary financial market situation globally that the world has seen for decades, or possibly ever," said Wheeler.