New Zealand’s central bank yesterday slashed interest rates by 150 basis points to a record low to combat the fallout from the global slowdown and left the door open for more cuts.
The official cash rate now stands at 3.5 percent, the lowest level since it was introduced in 1999.
Reserve Bank of New Zealand (RBNZ) Governor Alan Bollard said the economic news coming from the country’s trading partners was very negative.
“The global economy is now in recession and the outlook for international growth has been marked down considerably since our December monetary policy statement,” Bollard said.
“We now expect the impact on New Zealand of these developments to be greater than we did in December as a result of a more negative outlook for the terms of trade and exports, and tighter credit conditions,” he said.
The cut matches the central bank’s move at its last review last month and brings the total reduction since July to 4.75 percentage points.
Lower interest rates would help stimulate growth, provided firms and households do not unnecessarily tighten their purse strings, Bollard said.
“Globally, there has been considerable policy stimulus put in place and we expect this to help bring about a recovery in growth over time,” he said. “However, there remains huge uncertainty about the timing and strength of a recovery.”
Bollard said any further reductions in the official rate were expected to be smaller than recent cuts.
The New Zealand dollar fell from around US$0.53 to below US$0.52 after the announcement, closing local trading at US$0.5195.
Central banks around the world have been slashing rates as the impact of the global financial crisis puts the brakes on economic growth.
Economists said New Zealand interest rates would fall further to between 2.0 percent and 2.5 percent as the economic fallout from the crisis intensifies.
ASB chief economist Nick Tuffley said he expected the central bank to announce a 1 percentage point cut at its next review in March and for the official cash rate to bottom out at 2 percent.
“Although the RBNZ has preempted some downside risk, we expect that the bad news is likely to continue and the RBNZ will continue to revise down its growth forecasts,” he said.
New Zealand sank into recession at the beginning of last year because of the impact of a drought and the end of a property boom, while the global financial crisis has cast more gloom over the economy.
Evidence of the damage caused to New Zealand by the global slowdown could be found in figures released yesterday showing the annual trade deficit widening last month as export growth slowed.
The trade deficit last month reached NZ$5.6 billion (US$3 billion), up from NZ$5.2 billion in November, Statistics New Zealand said.
Imports last month rose 15.2 percent from a year earlier, but exports were up a lower-than-expected 0.5 percent, after excluding the impact of the unusual sale of large aircraft.
Government forecasts suggest the economy is likely to stand still this year and unemployment could rise from 4.2 percent to as much as 7.5 percent by next year. New Zealand Prime Minister John Key’s government is promising personal tax cuts and increased spending on infrastructure to help limit the damage from the global slump.
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