Bollard Says New Zealand Has Scope for More Rate Cuts

By Tracy Withers

Jan. 30 (Bloomberg) -- The Reserve Bank of New Zealand, which reduced interest rates to a record low this week, has scope for further cuts amid the deepening global slowdown, Governor Alan Bollard said.

“Lest there be any doubt, the tool box is by no means empty,” Bollard said in a speech today in Christchurch. “If we need to, there is still room for us to cut the cash rate further in response to adverse economic developments.”

Yesterday, Bollard slashed the benchmark rate by 1.5 percentage points to 3.5 percent as New Zealand’s economy sinks deeper into a recession that the governor said could last at least 18 months. He has pared borrowing costs by 4.75 percentage points since July, the most aggressive reductions behind Moldova among 54 central banks monitored by Bloomberg.

Bollard “is prepared to take interest rates well into uncharted territory,” said Khoon Goh, senior economist at ANZ National Bank Ltd. in Wellington, who expects the key rate will be cut to 2.75 percent in March.

New Zealand’s dollar fell to 50.95 U.S. cents at 2 p.m. in Wellington from 51.34 cents just before Bollard’s comments, extending its decline since yesterday’s rate cut to 3.9 percent. The benchmark NZX 50 stock index fell 0.5 percent to 2,757.55.

“New Zealand policy makers still have some ammunition up their sleeve,” said Goh, who added the extent of further reductions after March will depend on signs of a deeper slump.

Global Slump

The International Monetary Fund this week said world growth will be 0.5 percent in 2009, the weakest postwar pace. Exports are equivalent to about 30 percent of New Zealand’s gross domestic product.

“We have done a lot already and it will take some time for these actions to have their full effect,” Bollard said in notes of his speech e-mailed to Bloomberg News. “We are entering the year well-positioned on the monetary policy, liquidity policy and prudential policy fronts.”

The economy fell into a recession in the first quarter of last year amid a housing slowdown and soaring energy costs. The worldwide credit freeze and subsequent global slump have damped exports and stalled investment, and may prolong the recession until the second half of 2009, Bollard said yesterday.

“In the near term, there will be considerable downward pressure on the domestic downturn already well under way, with weakness in household expenditure, the export sector and activity likely to persist through the year,” he said today.

Tax Cuts, Spending

The government this month said the economy may stand still this year and the jobless rate could climb to an 11-year high. It is cutting income taxes and plans extra spending on roads, houses and schools to generate jobs and boost investment.

“The remedial efforts we have taken in New Zealand have probably been about as successful as might be expected,” Bollard said.

Still, companies, banks and consumers have a role to play to help the economy in its eventual recovery, he said.

“Households and firms should not pull down the shutters and banks should continue to lend on sound business propositions,” he said. “New Zealand’s economy and financial system are relatively well-placed to weather the adjustment. We should be watchful for the opportunities and mindful of the risks of defeatism.”

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