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Central bank kicks off first in series of rate cuts

Thursday 24th July 2008

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Reserve Bank of New Zealand Governor Alan Bollard kicked off what is likely to be string of interest rate cuts this year when he lowered the official cash rate for the first time in five years, economists say.

Bollard will reduce the benchmark rate at each six-weekly review through this year, according to economists at Westpac, Goldman Sachs JBWere, ANZ Bank and UBS. The New Zealand dollar dropped and bills and swaps rallied after today's central bank announcement.

New Zealand's economy probably shrank in the first half amid plummeting consumer confidence as households faced higher costs for food, fuel and credit. Bollard today said a weaker economy will ease pressure on resources and inflation will probably abate after reaching a peak of 5% in the September quarter.

"Rescuing growth is on the agenda for how," Brendan O'Donovan, chief economist at Westpac, said in a note today. Accelerating wagers growth and inflation "won't be enough to see them pause for breath any time soon."

O'Donovan said today's rate cut may have helped prevent a "de facto tightening" of monetary conditions because the global credit crunch has made it more expensive for banks to raise funds overseas to finance New Zealanders' borrowing habit.

"Today's cut will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households," Bollard said in the statement. Further reductions in borrowing costs will depend on further improvement in the outlook for inflation and no "excessive" deterioration in the New Zealand dollar, he said.

By Jonathan Underhill

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