New Zealand's central bank cut interest rates to an all-time low on Thursday and signalled the easing cycle was close to an end as it forecast the ailing economy to slowly recover later this year.
The Reserve Bank of New Zealand cut its benchmark rate by half a percentage point to 3.0 percent, sending the New Zealand dollar up 2.4 percent to $0.5144 from Wednesday. The currency stood at $0.5122/28 at 0411 GMT, while the yield on the June bank bill contract rose 16 basis points to 3 percent.
"As economic activity troughs, we expect rapid easing of monetary policy to slow," said RBNZ Governor Alan Bollard, adding that he did not expect to see in New Zealand the near-zero policy rates of some countries.
The central bank expects the economy to trough in the middle of this year, helped by the substantial reduction in borrowing costs, fiscal stimulus and the lower New Zealand dollar.
"The RBNZ has sent a clear signal it judges the end of the easing cycle is near," said ASB chief economist Nick Tuffley.
The bank scaled back the amount of easing, after two hefty cuts of 1.5 percentage points each in December and January. The magnitude of the RBNZs rate cut has been larger than elsewhere.
CYCLE BOTTOMING
The cut, the sixth since last July, took the cash rate to its lowest level since it was set up in March 1999. It peaked in July last year at 8.25 percent.
Economists said more rate cuts were on the agenda as New Zealand braced for its longest recession on record.
"There is more easing planned, the size is the question that is most uncertain," said UBS senior economist Robin Clements. "I've got another 50 basis points next month, and if there's signs of the world stabilising that might be chopped back to 25."
A Reuters poll after Thursday's move showed nine of 15 economists expect another 25 basis point cut at the RBNZ's April 30 rate review. Five each picked 50 and one saw no change.
The cash rate is seen bottoming at 2.5 percent by mid-year, but Bollard said he might cut further if necessary.
"It could go a little bit lower if we get softer news out of the rest of the world or if the New Zealand economy looks softer," he told CNBC television.
The RBNZ will next review the cash rate on April 30.
Even at that predicted poll level, the kiwi would still be attractive at a time when returns in other currencies diminish. Interest rates are already near zero in the United States, Japan, Canada and Britain. In the euro zone, rates were slashed to a record low of 1.5 percent.
RISK REWARDS
Because of its perilously low household savings, New Zealand has long lived on foreign borrowings to help fund its spending, reflected by the country's huge current account deficit.
While the rate cut was aimed at boosting domestic demand, the RBNZ was also fully aware that investors needed adequate returns for holding risky assets like the New Zealand dollar.
"New Zealand needs to retain competitiveness in the international capital markets," Bollard said, adding dependence on foreign funds will remain a clear vulnerability for some time.
By the end of September, the annual current account deficit was 8.6 percent of gross domestic product, compared with the peak of 9.3 percent in the first quarter of 2006. The bank forecast the deficit to only start narrowing in 2010 after staying around 8 percent of GDP this year.
Household borrowing stood at NZ$174.5 billion ($89 billion) at the end of December, largely financed by Australian banks which dominate the market and have so far escaped the meltdown. About 40 percent of borrowing is due for renewal this year.
New Zealand has been in recession since the start of 2008, its first downturn in a decade, but Bollard was cautiously optimistic the economy will grow in second half of the year.
