New Zealand May Cut Key Rate by Record 1.5 Percentage Points

By Tracy Withers

Dec. 2 (Bloomberg) -- New Zealand central bank Governor Alan Bollard will probably slash the benchmark interest rate this week by a record 1.5 percentage points in an attempt to steer the economy out of its worst recession in 18 years.

The Reserve Bank of New Zealand will cut the official cash rate to 5 percent, according to 10 of 17 economists surveyed by Bloomberg. Seven say Bollard will lower the rate by 1 percentage point at 9 a.m. on Dec. 4 in Wellington.

Central banks are cutting borrowing costs worldwide to try to stimulate spending and investment amid a global recession. New Zealand’s economy, which began contracting in the first quarter, needs lower income taxes, increased government spending and more interest-rate cuts to kick-start growth, economists say.

“Interest rates at the bottom of an economic cycle should be stimulatory and currently they are not,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. “We no longer see any reason the Reserve Bank should waste any time getting them there.”

Finance Minister Bill English, elected on Nov. 8, plans to cut income taxes in April and will this month announce increased government spending on schools and roads to bolster the economy.

Toplis predicts Bollard will lower interest rates by 1.5 percentage points this week and follow with a half-point reduction at his next review on Jan. 29. The official cash rate needs to get to 4 percent or less to stimulate spending, Toplis said.

Currency, Stocks

New Zealand’s currency has fallen 31 percent against the U.S. dollar the past six months and the benchmark NZX 50 stock index slumped 26 percent in the same period after Bollard began cutting interest rates in July.

In October, he reduced borrowing costs by 1 percentage point, which was the biggest move since the central bank began using the official cash rate in 1999.

The economy slipped into a recession in the first quarter amid a drought, soaring energy costs and a slump in the housing market. As the world’s largest economies contract, demand for exports is falling and business investment has stalled, prolonging New Zealand’s own recession.

The International Monetary Fund predicts advanced economies including the U.S. and euro area will contract simultaneously next year for the first time since World War II. The economies of New Zealand’s main trading partners may grow just 0.4 percent in 2009, according to Deutsche Bank AG.

Trade Risks

“We think the Reserve Bank will see substantial downside risks around the outlook for trading-partner growth,” said Darren Gibbs, chief New Zealand economist at Deutsche in Auckland.

Gibbs expects New Zealand’s economy will contract 1.3 percent next year after growing just 0.5 percent in 2008. The economy expanded 3.2 percent last year.

In September, Bollard forecast growth of 1.5 percent next year. He will revise his forecast this week.

Central banks around the world are slashing interest rates in response to a global slump in demand. The Reserve Bank of Australia will probably cut its cash rate target by three quarters of a point to 4.5 percent today, according to 15 of 21 economists surveyed by Bloomberg.

The Bank of England and the European Central Bank will also lower borrowing costs this week, according to separate surveys.

Bollard, 57, is responding to a slump in consumer spending and business confidence that is likely to see the jobless rate rise as companies fire workers to arrest a slide in profits, economists say.

Last month, companies were the most pessimistic about sales and profit in more than 20 years, according to a report released by ANZ National Bank Ltd. More than a fifth of companies said they are likely to fire workers and the proportion of firms expecting profit to decline was the highest in the 21-year history of the survey.

Job Cuts

Air New Zealand Ltd., the nation’s biggest airline, last month said it will fire as many as 200 full-time staff to reduce costs as demand for international travel slows. Half of the jobs will be long-haul cabin crew.

New Zealand’s jobless rate rose to a five-year high of 4.2 percent in the third quarter.

Slowing spending has curbed earnings at children’s clothing stores owned by Pumpkin Patch Ltd., Managing Director Maurice Prendergast said last month.

“We won’t be immune to the pain retailers and brand operators will face, and at this stage we aren’t quite sure where the end will be,” Prendergast told the Auckland-based company’s annual meeting on Nov. 18. The company has fired workers at its head office and reduced staff levels in all stores, he said.

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