Bollard Says N.Z. May Cut Key Interest Rate This Year

New Zealand's central bank Governor Alan Bollard said he may cut the benchmark interest rate from a record 8.25 percent this year, triggering the biggest slump in the currency in more than two months.

``We are now likely to be in a position to lower the official cash rate later this year,'' Bollard said in a statement released in Wellington today after he kept the rate unchanged. The currency's 2 percent decline after the statement was in line with the bank's expectations, he said.

Bollard, who kept borrowing costs unchanged since July, stalling domestic demand, says the economy contracted in the first three months of this year and he can't rule out a recession. Retail sales and employment fell in the first quarter and house sales slumped in April to a 16-year low.

``There is little doubt in our mind that current monetary policy has been too tight,'' said Shamubeel Eaqub, an economist at Goldman Sachs JBWere Ltd. in Auckland. ``The underlying economy is slowing sharply and a hard landing in 2008 is almost a sure thing.''

New Zealand's dollar fell to 76.65 U.S. cents at 1:48 p.m. in Wellington from 78 cents before the statement and 78.28 cents in late Asian trading yesterday. There is a 26 percent chance of a quarter-point rate cut at the next review on July 24, according to an index calculated by Credit Suisse.

The economy contracted 0.3 percent in the first quarter and will expand just 0.2 percent in the three months ending June 30, the central bank said in forecasts released today.

Growth will slow to 0.9 percent in the year ending March 31, 2009, from 3.1 percent a year earlier, it said. That's the weakest growth since 1998.

Bollard, who is required by the government to keep inflation between 1 percent and 3 percent, said prices will accelerate in the near term because of rising fuel and food costs.

Consumer prices are projected to rise 4.7 percent in the year ending Sept. 30 from 3.4 percent in the 12 months through March. Annual inflation will average 4.1 percent in the first half of 2009 before slowing to 2.9 percent a year later, the central bank forecasts. Previously, the bank expected inflation would be below 3 percent by mid-2009.

Inflation is being fanned by rising fuel and food prices Gasoline has jumped 28 percent the past year to a record NZ$1.97 a liter ($5.81 a gallon). Groceries have risen 11 percent.

The central bank said the economy shrank 0.3 percent in the first quarter as domestic demand slowed. First-quarter retail spending fell 1.2 percent, the biggest drop in 11 years, and employment declined the most since 1989.

Economic growth will average 1.6 percent in the three years to March 2011, the central bank forecasts. Household spending growth will be flat and employment will decline for the next three years, it said.

Companies are closing factories. Dunedin-based PPCS Ltd., the nation's biggest meat processor, said last month it will shut two abattoirs and fire 604 workers. Fisher & Paykel Appliances Ltd. said in April it was closing a dishwasher manufacturing plant, with the loss of 430 jobs.

The central bank said capacity constraints in the economy will ease, relieving pressure on inflation. The risk is that domestic spending is weaker than forecast as falling property values and rising costs curb disposable incomes, it said.

Bollard Says N.Z. May Cut Key Interest Rate This Year, Bloomberg
6/4/2008 7:39:26 PM