Cullen Says New Zealand Economy Faces `Serious Challenge'

By Tracy Withers

Aug. 28 (Bloomberg) -- New Zealand's economy is facing a serious challenge as soaring credit costs and rising fuel and food prices put consumers under pressure, Finance Minister Michael Cullen said.

``New Zealand is acing a serious economic challenge generated by the global credit crunch and steep rises in commodity prices,'' Cullen said in a speech in Auckland today. Consumers ``have certainly felt pressure this year, both at the petrol pump and the supermarket checkout.''

The $105 billion economy was probably in recession in the six months through June as drought and a plunging housing market curbed spending, the Treasury Department said this month. The central bank cut interest rates last month for the first time in five years and said further reductions are likely as demand slows and inflation eases.

``Relief is in sight both through lower interest rates and personal tax cuts on Oct. 1,'' Cullen said. Notes of his speech were posted on the government Web Site.

The government's strategy of reducing debt and maintaining a strong fiscal position is the correct one in face of ``the most complex and challenging set of economic forces we have confronted in at least two decades,'' he said.

High debt means New Zealand will have structurally higher relative interest rates irrespective of the cycle of monetary policy, he said.

Cullen has bolstered saving by starting a fund from which future pensions will be paid and by introducing a workplace savings plan.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.