N.Z. May Cut Key Rate By Record 100 Basis Points

By Tracy Withers

Oct. 22 (Bloomberg) -- New Zealand central bank Governor Alan Bollard will probably cut interest rates tomorrow 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. Two say Bollard will lower the rate by three-quarters of a point when he announces his decision at 9 a.m. in Wellington.

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 U.S. cents on Oct. 8, amid expectations of further interest-rate cuts. The currency bought 60.92 cents at 12:30 p.m. in Wellington.

Economic Recession

Bollard cut the rate by a quarter point in July and a half point to 7.5 percent on Sept. 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 Oct. 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.

Faster Inflation

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 ended Sept. 30, Statistics New Zealand said yesterday.

Still, Bollard expects the inflation rate will slow to 3 percent by early 2010, giving him scope to cut interest rates. The central bank is required to keep average price gain between 1 percent and 3 percent.

``The economy will operate at a below-potential pace for some time,'' said Robin Clements, chief New Zealand economist at UBS AG in Christchurch. ``The Reserve Bank should have far greater confidence in the prospect for inflation to come back within the target.''

The International Monetary Fund said on Oct. 8 expansion in the world's advanced economies next year will be the slowest since 1982. Global growth may be 3 percent -- a level the fund itself has called the dividing line between a global recession and expansion.

Earlier this month, the Federal Reserve, the European Central Bank and counterparts in London, Sweden and Canada cut their benchmark interest rates by half a point to restore confidence in markets and limit damage to their economies.

Bollard, 57, will cut the rate again in December to 6 percent, according to the economists surveyed by Bloomberg. The rate will be 5.5 percent by March, the lowest level since April 2004, they forecast.

Consumer confidence is falling and the housing market is contracting. House prices dropped 6.1 percent in September from a year earlier. House sales are close to a 16-year low.

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