NEW Zealand central bank Governor Alan Bollard will probably cut interest rates today by a record amount to limit damage from the global financial crisis.
The Reserve Bank will cut the official cash rate by 1 percentage point to 6.5 percent, according to nine of 11 economists surveyed by Bloomberg News. Two say Bollard will lower the rate by three quarters of a point when he announces his decision.
Central banks are cutting rates worldwide in an attempt to unfreeze credit markets as the financial meltdown threatens to spark a global recession. New Zealand's economy is already contracting, which prompted Bollard to start lowering borrowing costs in July to kick-start consumer and business spending.
"The global situation is deteriorating rapidly," said Brendan O'Donovan, chief economist at Westpac Banking Corp in Wellington. "New Zealand will face tighter credit and weaker exports. A large cut is clearly warranted." Since the central bank began using the official cash rate in 1999, the most it has either raised or lowered borrowing costs is a half point. Earlier this month, the Reserve Bank of Australia cut its target rate by 1 percentage point, the biggest adjustment since 1992.
New Zealand's dollar has slumped 20 percent the past three months, reaching a three-year low of 57.92 US cents on October 8, amid expectations of further interest-rate cuts. The currency bought 60.92 cents at 12:30pm in Wellington yesterday.
Bollard cut the rate by a quarter point in July and a half point to 7.5 percent on September 11 as New Zealand entered its first recession in 10 years, contracting 0.2 percent in the second quarter after shrinking in the three months to March.
He forecast another contraction in the third quarter. Companies also expect a drop in sales in the final three months of the year, according to a survey by the New Zealand Institute of Economic Research Inc released on October 7.
Growth in 2008 will probably slow to 0.5 percent from 3 percent in 2007 amid a slump in consumer confidence and a plunge in the housing market, the Treasury Department said this month. Exports, which make up 30 percent of the economy, are slowing as a drought curbs farm production and world butter and cheese prices decline.
While the economy stalls, high fuel and food prices have driven faster inflation. Consumer prices rose at the fastest pace in 18 years in the year to September 30, Statistics New Zealand said yesterday.