Weakening economy paves way for more rate cuts

Tuesday 5th August 2008

New Zealand's weakening economy provides room for more interest rate cuts, according to central bank Governor Alan Bollard.

The economy probably fell into recession in the first half, the Treasury said today, the first in a decade. Economists predict Bollard will cut the official cash rate at each six-weekly review between now and the end of the year.

Bollard last month cut interest rates for the first time since June 2003, betting a slump in consumer demand will help prevent companies passing on cost increases and slow inflation after an annual peak of 5% in the September quarter.

"People are going to be really hesitant about price increases and things like that, so that's given us enough room to cut," Bollard told Radio New Zealand today. "We've got nasty inflation right at the moment," though that's likely to abate, he said.

The prospect of lower interest rates has helped drive the kiwi dollar down from its peak of more than 80 US cents this year. The currency fell as low as 72.57 cents today, the lowest in about 10 months.

Finance Minister Michael Cullen today said a weaker currency should help revive the economy in the second half of the year, by swelling export returns.

"The dollar's come back somewhat so that'll be help in the export sector starting to feed through," he told reporters today. "Things are looking better for the latter part of this year. Expansion should pick up," he said.

The first stage of tax cuts announced by Cullen in this year's budget kick in on October 1, while torrential rain in many parts of the country has doused concern about the impact of drought on farm production.

By Jonathan Underhill

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