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WELLINGTON: New Zealand's central bank cut the official interest rate Thursday for the first time in five years, saying the slumping economy would offset stubbornly high inflation.
Reserve Bank of New Zealand Governor Alan Bollard cut the official cash rate by a quarter percentage point to 8.0 per cent in the first cut since July 2003 and said further reductions were likely.
"Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the official cash rate further," Bollard said.
The New Zealand dollar fell nearly one US cent to 74.35 US cents shortly after the announcement and ended local trading at 74.30.
The New Zealand Stock Exchange's benchmark NZX-50 index jumped 85.58 points or 2.67 percent to 3,287.23 by the end of trading.
With food and energy prices soaring, Bollard acknowledged continuing price pressures would see inflation reach a forecast high of around 5.0 per cent in the September quarter.
But he added he expected inflation to return to the central bank's target range of one to three per cent in the medium term.
Inflationary pressures have been the main factor in discouraging the central bank from cutting rates this year, but Bollard said the slumping economy should ease price rises in coming months.
"The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed," Bollard said.
Official figures showed the economy shrank 0.3 per cent in the March quarter from the previous three months and there are widespread expectations of a further contraction in the June quarter.
Two straight quarters of economic contraction means New Zealand will have fallen into recession, according to the definition used by many economists.
Bollard said a worsening international situation meant there was a risk that the domestic economy would slow further and it was costing local banks more to raise funds overseas because of the global credit crunch.
"Today's cut will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households," he said.
Many economists had not been expecting the central bank to start cutting the official rate until its next six-weekly meeting in September.
But ANZ chief economist Cameron Bagrie described the cut as a prudent response to a difficult economy and said he expected three more cuts before the end of the year.
"The Reserve Bank's economic assessment looks to be very similar to our own in that conditions are just not stabilising, and in that environment they needed to act," Bagrie said.
BNZ economist Stephen Toplis said that while the cut itself was not a great surprise, the signalling of future cuts was more dovish than he anticipated, giving the green light for interest rate markets to rally strongly.
"We thought they might try to hold the market in check to make sure it didn't get carried away."
- AFP/jk
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