The New Zealand Reserve Bank has chopped its key interest rate by a record 1% to try and offset the impact of a recession and the global financial crisis.
The RBNZ in effect matched the October 7 Reserve Bank of Australia rate cut of 1%.
That would take the official cash rate to 6.5%, compared with Australia’s 6%.
New Zealand’s economy is already in recession, which has prompted the RBNZ to start lowering borrowing costs in July to kick-start consumer and business spending.
Up till today, the central bank had cut rates by 0.75% as more and more figures emerged to show the economy was heading towards recession with two quarters of negative economic growth. That’s where it is now
Reserve Bank Governor Alan Bollard said in a statement this morning:
The "ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today’s decision.
"Economic activity in New Zealand will be further constrained, relative to the outlook presented in our September Monetary Policy Statement, by these international developments.
"New Zealand can expect to face lower demand for exports and credit is likely to be less readily available. In this environment consumers and businesses are likely to be more cautious and curtail spending.
“The reduction in domestic spending will be partly offset by the depreciation of the New Zealand dollar over the past few months, falling oil prices and the recent loosening of fiscal policy.
“With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to 3 percent around the middle of 2009.
"However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high.
“Consistent with the Policy Targets Agreement, the Bank’s focus will remain on medium-term inflation.
"Should the outlook for inflation evolve as projected we would expect to lower the OCR further.
"However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out.”
The New Zealand’s dollar has slumped 20% over the past three months, reaching a three-year low of 57.92 US cents earlier this month (on October 8 as shares slumped around the world, currencies plunged and credit markets froze in the wake of the Lehman Brothers collapse and the spate of bank rescues in Europe.
The currency traded around 60.90 yesterday.
The RBNZ cut the OCR by 0.25% in July and a 0.50% in early September to 7.5% (just ahead of the fateful weekend when Lehman Brothers failed, Merrill Lynch was forced into the arms of Bank of America and AIG started imploding, to be saved by the Fed).
That was days after the NZ economy shrank for a second quarter in the June quarter after contracting in the three months to March.
RBNZ Governor, Alan Bollard has forecast another contraction in the third quarter, leading to expectations of a rate cut much larger than the one in early September. Today’s statement left further rate cuts on the table as options to handle the slowdown.
That’s despite inflation climbing to 5.1% in the September quarter. That was an 18 year high.
But the central bank expects (like our RBA) inflation will slow to 3% by early 2010, leaving more room to cut rates.
ON Tuesday, the Canadian central bank again cut interest rates and declared the US economy was in recession.
The Canadian central bank said Tuesday the US economy was already in recession as it announced a second unscheduled interest rate cut this month to stimulate domestic demand.
The bank lowered its key rate, the overnight rate, to 2.25 percent and said further action may be necessary to stimulate demand as the commodity-focused and US-dependent Canadian economy sags.
The Canadian central bank had joined in a half-point coordinated rate cut by the Federal Reserve, the European Central Bank and other major central banks on October 8 in an extreme action to combat the global financial crisis.
