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Dollar hits five-year low as RB cuts rate to 6.5%

By Paul McBeth

Thursday 23rd October 2008

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The New Zealand dollar sank to a five-year low and may extend its slide after the Reserve Bank cut the official cash rate by 100 basis points amid the outlook for a worldwide downturn in economic activity.

“Ongoing financial market turmoil and a deteriorating outlook for global growth” were the main reasons for the cut, said Governor Alan Bollard in a statement. “The reduction in domestic spending will be partly offset by the depreciation of the New Zealand dollar.”

In further signs of a global slump, Bank of England Governor Mervyn King yesterday said the UK economy has probably entered a recession. The FTSE 100 Index fell 4.5%, as did Germany’s DAX 30. The Dow Jones Industrial Average slid 6.7% and prices tumbled for oil, gold and copper.

The New Zealand dollar fell as low as 58.29 US cents after the statement, from 59.97 cents yesterday. It recently traded at 59.35 cents. It plunged to as low as 56.9 yen from 59.54 yen and was recently at 58.01 yen. It dropped as low as 87.30 Australian cents from 89.18 cents and was recently at 88.04 cents.

“The long-term trend is down,” said Michael Gordon, Westpac economist, of the kiwi. The currency had to “absorb the effects of the world economy” slowing, which will curb demand for the nation’s exports of dairy products, meat and logs.

The New Zealand economy contracted in the first two quarters of the year and some economists now predict it will extend the contraction to a full 12 months in the first recession since 1998.

ANZ Bank has predicted the OCR will be cut to as low as 4.75% in 2009 to restore an economy hit by a housing slump, waning corporate profits and a rising jobless rate.

Inflation peaked at an annual rate of 5.1% in the third quarter and will probably recede back to within the central bank’s 1% to 3% target range by mid-2009, Bollard said today.

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