New Zealand Rates Fall to Record Low, More Cuts Seen

New Zealand's central bank slashed interest rates by 150 basis points to a record low of 3.5 percent on Thursday to boost an economy deep in recession, and left the door open for further, smaller cuts.

CNBC.com

The New Zealand dollar tumbled a full cent after the Reserve Bank of New Zealand (RBNZ) cut rates for the fifth straight time, saying very negative news from trading partners and worsening global outlook played a large part in its decision.

"Certainly the policy in New Zealand is going to need to keep being eased, given the global outlook is deteriorating on a daily basis," said Citi's head of market economics, Stephen Halmarick.

The New Zealand dollar fell around 2 percent to around $0.5190 after
the rate decision, while the yield on the March bank bill contract fell 25 basis points to 3.25 percent.

Eight of 16 economists in a Reuters survey had expected a 100 basis point cut. Two had predicted a 150 basis point cut while six picked a less than 1 percentage point decrease.

The cut, which puts the cash rate at its lowest level since it was introduced in 1999, comes as New Zealand's economy shrank in the first three quarters of last year -- the first recession in a decade.

The RBNZ said the world economy was effectively in recession and that was hitting New Zealand harder than first thought.

"We're probably still in recession and we will likely be there for the first half of this year," RBNZ Governor Alan Bollard told reporters.

Unlike the United States and Japan, where key rates have been cut to near zero to revive their economies, analysts expect more cuts to come from the RBNZ, albeit at a slower pace.

Bollard declined to give an estimate of how low rates could fall, but said further rate cuts would depend on the global picture.

He said the inflation threat was diminishing.

"Inflation pressures are abating. We have confidence that annual inflation will be comfortably inside target band," Bollard said. The RBNZ is required to keep inflation within a 1 percent to 3 percent range on average over the medium term.

Expectations for further rate cuts hardened earlier this month after a closely-watched business confidence survey pointed to a deepening recession.

Finance Minister Bill English told Reuters on Tuesday that New Zealand's economic outlook has deteriorated since last month, raising the specter of a long and painful recession and more interest rate cuts.

English also said the central bank had been carrying much of the load in combating the recession impact and global downturn by lowering its cash rate.

New Zealand's rate compares with official rates of 4.25 percent in Australia, 0.1 percent in Japan, 2.0 percent in the Eurozone and 0-0.25 percent in the United States.

The New Zealand dollar was once a favorite destination for yield hungry investors because of its attractive rate differential. Foreigners still hold about two-thirds of New Zealand government securities, issued to help finance its budget.

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