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NZ surprises with rate cut
WELLINGTON, New Zealand (CNN) -- New Zealand's central bank has cut its benchmark cash rate by 0.25 percentage points to 5.5 percent, its first change since July last year. The surprise move takes it closer to the 4.75 percent rate prevailing in Australia, its closest neighbor and main trade partner. Reserve Bank of New Zealand Governor Alan Bollard said Thursday that further cuts were possible if inflation settled "comfortably" in a target range of 1.0 to 3.0 percent. Bollard said that growth in New Zealand's economy was slowing, with a weak international economy being reflected in "softer activity" on the trade front. He cited the SARS virus and potential power shortages as having a possible impact. New Zealand's trade and services sectors rely heavily on agricultural exports and international tourism. Flag carrier Air New Zealand made further cuts to its international capacity and downgraded its profit outlook by 13 percent on Wednesday because of the SARS outbreak. (Full story) But Bollard noted that New Zealand's domestic economy was still relatively robust, especially in the housing market. "We are now more confident that inflationary pressures will ease, which is the basis of today's decision," he said. Bollard warned that this should not be interpreted as the central bank having a more pessimistic view of the New Zealand economy. Instead, it was a confirmation of the bank's earlier expectations. Last month the bank said growth would slow from a 4.5 percent annualized rate in the December 2002 quarter to 2.5 percent for the year to March 2004. The 0.25 percentage points rate cut surprised some analysts, who thought any move would come later in the year. HSBC's chief economist for Australia and New Zealand, John Edwards, said Thursday that lower global oil prices and a stronger New Zealand dollar would likely help contain inflation, and the global economy would be only "slightly stronger" in the second half of 2003. "Accordingly, we look to another 25 basis points cut within three or four months," Edwards said. The New Zealand dollar is trading at 55.30 U.S. cents on Thursday afternoon, down about 0.7 percent from Wednesday. On the stock market, the New Zealand Top 50 index is up about 1 percent to 1997.98.
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