Reuters New Zealand
New Zealand cuts rate, plans more, as recession looms
Thursday July 24, 05:22 PM
* NZ central bank cuts rates by a quarter point to 8 percent
* RBNZ expects further easing to counter slowing economy
* NZ dollar hits one-month low after announcement (Adds updated Reuters poll)
By Kazunori Takada
WELLINGTON, July 24 (Reuters) - New Zealand's central bank cut interest rates for the first time in five years on Thursday and said it would cut again, betting an economy on the brink of recession would cool the fastest inflation in two years.
The New Zealand dollar hit a six-month low on the news of the quarter point cut to 8.00 percent. The currency had rallied to a post-float peak in March as central bank rate rises gave New Zealand one of the the highest borrowing costs in the industrialised world.
A majority of analysts had forecast the Reserve Bank of New Zealand would keep rates on hold at this meeting after inflation jumped unexpectedly to a two-year high in of 4 percent in the second quarter, a full percentage point above the top of its target range.
But with the economy shrinking for the first time in two years in the second quarter, the Reserve Bank of New Zealand said the downturn in activity would gradually dampen prices.
"Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the official cash rate further," Governor Alan Bollard said in a statement.
Central banks in other developed countries, grappling with the impact of a global credit crunch, are also torn between the risk of recession and surging inflation. Market bets on rate rises this year from the U.S. Federal Reserve and the Bank of Japan have faded and one member of the Bank of England voted for a cut this month.
This was New Zealand's first rate cut since July 2003.
A Reuters poll conducted after Thursday's announcement showed all 17 economists expected the central bank to cut rates again at the next review on Sept. 11 and a majority see the cash rate falling to 7.25 percent by the year-end. [ID:WEL169136]
"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.
KIWI TUMBLES
The New Zealand dollar, bolstered by investors seeking to profit from the country's record interest rates, tumbled 1 percent on the news, before trimming losses to settle around $0.7420. The kiwi rose more than 11 percent last year as central bank raised rates four times. It peaked at $0.8215 in March.
"It's going to signal the end to the kiwi dollar," said TD Securities senior strategist Joshua Williamson. "I would expect to see a progressive decline back to the mid-65 cents by mid-next year."
Short-term debt rallied, with yields, which move inversely to prices, around 10 basis points lower.
The rate cut would help relieve the tight lending conditions caused by the global credit crunch, Bollard said
The credit crunch claimed another New Zealand victim on Wednesday, when Hanover Finance, the nation's fifth-largest finance firm, said it would suspend repayment of loans and interest.
The central bank, which lifted interest rates by a total of 1 percentage point last year to cool domestic demand, had said last month it was likely to ease this year as a slowing economy reins in prices.
The economy contracted a seasonally adjusted 0.3 percent in the January-March quarter. Most analysts think the second-quarter was as bad or even worse. (Editing by Jonathan Standing and Dayan Candappa)
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