For the first time since March 2011 the Reserve Bank has cut the Official Cash Rate down from 3.5 to 3.25 per cent.

And it is saying there may be more drops to come.

It has done this on the back of what it says a rapidly deteriorating situation in the dairy industry.

This is reflected in a revised forecast for the terms of trade in the Bank’s March quarterly forecast.

It is assuming that the terms of trade will remain about 5 percent lower over the next three years than it predicted in March.

It says dairy and forestry prices have fallen markedly.

The result has been a significant decline in national income.

“A risk is that continued low international prices cause farm expenditure and spending in rural areas more generally to slow markedly,” it says.

It says farmers’ incomes in the 2014/2015 season are expected to be around $7 billion lower compared with last season.

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That represents a fall of three percent in nominal GDP.

“If the dairy payout is low in the 2015/16 season as well, farmers’ spending could fall sharply.”

This echoes the concerns of Finance Minister Bill English on Wednesday that the outlook for some dairy farmers over the next few months could be grim.

This has clearly been a key factor in the decision to drop the OCR.

It also says there has been negligible inflation in the tradables sector — particularly because of a big drop in oil prices which was reflected in the March 2015 quarter.

But it warns that oil prices are already increasing and that tradables inflation is expected to increase sharply over the next year.

It says that what has been driving the domestic economy along have been the increases in construction in Canterbury and elsewhere, low interest rates and strong net migration.

“The positive impulse to GDP growth from construction and net immigration is expected to wane over the next three years,” it says.

So adding together the decline in the terms of trade and the forecast waning in domestic demand the Bank says “additional monetary stimulus is required to ensure that inflation returns to the midpoint of the 1 to 3 percent target range over the medium term.”

It concedes that housing demand remains strong “due to growth in employment, elevated consumer confidence, strong population growth and falls in mortgage interest rates.”