By Tracy Withers
April 30 (Bloomberg) -- New Zealand’s central bank cut its benchmark interest rate by half a percentage point to a record 2.5 percent and said borrowing costs will stay low until late next year to help the economy recover from a recession.
“We expect to keep the cash rate at or below the current level through until the latter part of 2010,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today. “The cash rate could still move modestly lower over the coming quarters.”
Bollard has cut the official cash rate by 5.75 points since July and Finance Minister Bill English lowered income taxes on April 1 to help New Zealand recover from its worst recession in more than three decades. New Zealand’s dollar and bond yields dropped as investors bet that borrowing costs will fall toward 2 percent later this year.
“The Reserve Bank has left the door open to further cuts, which will help reinforce the message that interest rates will remain low for an extended period of time,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. He expects a quarter-point cut at the next review on June 11.
New Zealand’s dollar slumped to 56.40 U.S. cents at 9:55 a.m. in Wellington from 57.31 cents immediately before the statement. The yield on a benchmark three-year government bond fell 29 basis points, or 0.29 percentage points, to 3.43 percent.
Swap Rates
New Zealand swap rates dropped by the most this month. The fixed payment made to receive two-year floating rates slid to 3.38 percent from 3.66 percent yesterday.
Eleven of 13 economists surveyed by Bloomberg News forecast today’s rate move. Two expected a quarter-point reduction.
Inflation is easing faster than expected and the economy remains weak, Bollard said.
“The main factors behind this are weaker global growth and an unwarranted tightening in financial conditions via both higher long-term interest rates and a stronger exchange rate than expected,” he said.
Central banks around the world have slashed interest rates amid a gloomy outlook for the global economy. The Reserve Bank of Australia unexpectedly cut its cash rate target to 3 percent this month. The European Central Bank’s benchmark is 1.25 percent and benchmarks in Japan and the U.S. are close to zero.
The International Monetary Fund said last week the global recession will be deeper and the recovery slower than previously forecast. The world economy will shrink 1.3 percent this year, the Washington-based IMF said on April 22.
Business Investment
New Zealand’s economy is in its sixth quarter of recession as the global downturn curbs exports and business investment, the central bank said today.
“While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak,” Bollard said. “We consider it appropriate to provide further policy stimulus.”
Business confidence fell to a 35-year low in the first quarter, according to a survey by the New Zealand Institute of Economic Research Inc. Investment intentions were the worst since 1975 and the proportion of companies expecting to fire workers was the highest since 1991, the Wellington-based institute said on April 7.
The unemployment rate could rise to a 10-year high of 6.8 percent by early 2010, Bollard forecast last month. Some economists say the jobless rate could reach 8 percent, from 4.7 percent in the fourth quarter of last year.
Ports of Auckland Ltd., the nation’s largest port operator, said last week it will fire 30 workers as global trade in containers declines.
OECD Survey
Newspaper publisher Fairfax Media Ltd. said it would cut 70 production staff. Inland Revenue may fire 250 workers after the government told the tax agency to review its budget as part of cost reductions across the state sector.
The Organization for Economic Cooperation and Development says there is room for Bollard to cut further, particularly as inflation eases. Consumer prices rose 3 percent in the year ended March 31, slowing from 3.4 percent in the year to December, according to government figures released on April 17.
“The Reserve Bank still has room to go further in responding to deteriorating economic conditions,” the OECD said in its economic survey of New Zealand released on April 16.
Lower borrowing costs and the fiscal stimulus will support the economy “and eventually see activity trough and pick up thereafter,” Bollard said today. Still, “the scale of the global financial crisis and domestic adjustments under way are such that it is likely to be some time before economic activity returns to robust and healthy levels.”
Today’s statement contained no new economic forecasts. In March, the central bank predicted the economy would rebound strongly next year. More recent forecasts from the IMF and OECD forecast growth of just 0.5 percent in 2010.
To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.
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