Reuters New Zealand
NZ cenbank cuts rates, sees further easing
Thursday July 24, 09:44 AM
WELLINGTON, July 24 (Reuters) - New Zealand's central bank cut interest rates for the first time in five years on Thursday, and said further reductions were likely to counter a rapidly slowing economy, sending the currency sharply lower.
The market had been split ahead of the decision, which came as recent data suggested the economy is likely in recession but also suffers surging inflation.
The Reserve Bank of New Zealand (RBNZ) cut its cash rate by a quarter percentage point to 8 percent, after being on hold for a year, saying the downturn in activity would gradually dampen rampant inflation pressures.
"There'll be a series of 25 basis point cuts until they think they've done enough, and that should extend into early next year," said UBS senior economist Robin Clements.
The New Zealand dollar initially fell over three-quarters of a cent to a six-month low of $0.7410 NZD=D4 before trimming its losses to settle around $0.7440.
Short-term debt rallied with the yield on the September bank bill NBBU8 eight basis points lower at 8.08 percent, and the December contract NBBZ8 nine basis points lower at 7.65 percent.
New Zealand's attractive interest rates, among the highest in countries of the Organisation for Economic Co-operation and Development (OECD), were a key driver in lifting the currency to a post float 23-year high in March.
It was the first easing in policy since July 2003 and comes after six consecutive reviews held rates at a record 8.25 percent.
The central bank, which lifted interest rates by a total of 1 percentage point last year to cool robust domestic demand, said last month it was likely to ease policy later this year as a slowing economy offset inflation.
A Reuters poll showed 13 of 17 economists expected the central bank to leave rates unchanged, with the median risk of a 25 basis-point cut put at 40 percent. But money markets had priced in a 50:50 chance of a rate cut, traders said.
RBNZ Governor Alan Bollard said the rate cut will help ease tight credit conditions caused by a deterioration the international financial market, and a further reduction in the official cash rate (OCR) was likely.
"Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the OCR further," Bollard said in a statement.
The Reuters poll had a median expectation of the cash rate sitting at 7.5 percent by the end of the year.
Since the previous rate review in early June, data showed inflation jumped to a higher-than-expected 4 percent in the second quarter, its highest level in two years and moving further above the central bank's 1-3 percent target range.
But widespread weakening in activity has convinced many that the economy has fallen into its first recession in more than a decade.
The economy contracted a seasonally adjusted 0.3 percent in the January-March quarter, as tight credit conditions and rising costs weighed on consumer spending and drought hit farm production.
The fall was in line with the central bank's expectation, but most analysts think second-quarter activity was as bad or worse, and the weakness may have spilled over into the third quarter.
Retail sales fell at their fastest pace in more than four years in May, consumer confidence dropped to 17-year lows in the June quarter and house sales hit 16-year lows in June.
RBNZ's Bollard said there was a risk the economy could slow further and reiterated that inflation was expected to return within the central bank's target band over the medium. (Editing by Jonathan Standing)
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