NZ central bank cuts 1.5 percent from key rate

WELLINGTON, New Zealand - New Zealand's central bank slashed its key interest rate by 1.5 percentage points to 5.0 percent Thursday — its biggest move yet in the fight against the global financial crisis and sharply weakening growth.

The unprecedented 1.5 percentage point cut in the official cash rate had been widely expected by economists and markets.

Thursday's move means the official cash rate has been reduced by 3.25 percentage points since July from a high of 8.25 percent.

Reserve Bank Governor Alan Bollard said the cut means New Zealand's monetary policy is now "expansionary," and takes the official cash rate to a five-year low.

Further, though smaller, interest rate cuts may be warranted in coming months, he added.

"Given recent developments in the global economy, the balance of risks to activity and inflation are to the downside," Bollard said. "Thus it is appropriate to deliver this reduction quickly to support the economy."

With activity in most of New Zealand's trading partners likely to contract or only grow very slowly, economic activity in New Zealand would be even further constrained than the bank was expecting just a month ago, he said.

The bank projects annual GDP growth to trough at -0.2 percent about mid-2009, before clawing back to positive growth of 1.3 percent in the March 2010 year.

Finance Minister Bill English said the rate cut would help stimulate the recession-hit economy.

"The drop in interest rates alongside the significant tax cuts in the government's stimulus program mean that we will take the hard edge off the recession." he told The Associated Press.

"It will be some time before the economy gets going again but we would hope the worst scenarios of sharply rising unemployment won't occur — but it's still going to be a tough time," he added.

Current data suggested the economy was "bouncing along the bottom of a shallow recession" rather than being "headed for something sharp," English noted.

The central bank's rate cut comes despite official figures showing the annual inflation rate at an 18-year high of 5.1 percent in the three months ended Sept. 30. The bank is required to keep inflation within a 1-3 percent band over the medium term.

Bollard said the bank is confident it can get the current 5.1 percent inflation rate back inside its 1-3 percent target band in the first half of next year.

He also warned banks and other financial institutions that the central bank expects them to play their part in helping the economy out of recession by passing on the lower interest rates to customers.

Five trading banks moved within hours to cut home loan rates, with some offering borrowers the lowest rates in four years.

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