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Dollar holds below 53 US cents after record rate cut

By Paul McBeth

Thursday 4th December 2008

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The New Zealand dollar held below 53 US cents as Reserve Bank Governor Alan Bollard slashed the official cash rate by 1.5 percentage points to 5%, its lowest level in five years, amid prospects for a deepening global economic slump.

Bollard said it is “appropriate to deliver this reduction quickly to support the economy and keep inflation from falling below the target band.” New Zealand’s economy entered recession in the first half of this year, and the central bank has slashed the official cash rate in its steepest series of cuts since the implementation of the OCR in 1999.

“We’re in the most challenging times in 20 years,” said Cameron Bagrie, chief economist at ANZ National Bank. “I think we’ll see the OCR have a three in front of it” in 2009.

The kiwi was little changed from immediately before Bollard’s announcement at 52.83 US cents. It has fallen 13% in the last month from 60.58 cents. It rose to 49.17 yen from 48.88 yen yesterday.

Bagrie said the kiwi will “probably wobble a little” before heading back to tracking global equity markets.

The central bank has been slashing rates since July in a bid to reduce the cost of loans and open up access to credit. When monetary policy was last reviewed in October, Bollard made what was then a record cut of 100 basis points, following a slew of other large central bank rate cuts around the world.

In a sign of weakening world demand, New Zealand commodity prices fell for a fourth month in November, according to a report yesterday. The ANZ Commodity Price Index fell 7.2% in November, stretching its four-month slide to 21%. Prices for dairy products fell 12% and have almost halved from their record levels a year ago.

More weak data from Europe has investors pessimistic over the state of the global economy. The Reserve Bank of Australia surprised economists earlier this week with a bigger-than-expected cut of 100 basis points, and Europe’s central bank is likely to continue its aggressive easing this week, economists say.

The outlook for the service sector in the UK declined, with the Services Purchasing Manager’s Index falling to 40.1 in November from 42.4 in October. With the economy in recession, the Bank of England is forecast to cut its benchmark rate by at least 100 basis points to 2% this week.

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