Bollard signals end to steep easing cycle as economy troughs

While New Zealand’s economy has fallen into a “deeper and more prolonged recession,” interest rates were now at “very stimulatory levels,” he said. The kiwi dollar jumped to 51.20 US cents after the statement from 50.54 cents immediately before.

“Rates could go lower, like 2%, but it was unlikely, and possibly negative for them go any lower,” Bollard told a media conference in Wellington.

Interest rates have been slashed by 5.25 percentage points since July, as Bollard bet inflation will evaporate as the economy stays mired in a prolonged recession. Today’s cut matched the median estimate in a Reuters survey. Inflation is forecast to fall to an annual rate of 3.1% in the March quarter, before sliding to a 1.9% annual rate in June, back within the central bank’s target band. Inflation was 3.4% in 2008.

“This statement suggests the RBNZ is holding back, RBA style, although with one key difference – the need to retain a higher interest rate to attract international funding,” said Imre Speizer, currency strategist at Westpac Banking Corp. “The OCR can still get to the 2.5% trough.”

The economy contracted 0.8% in the fourth quarter, and will likely extend its slump with a further 0.8% decline in the first three months of this year, Bollard forecast today. New Zealand is stuck in its first recession in a decade as unemployment rises, corporate earnings decline, and overseas demand for the nation’s goods dwindles. GDP shrank 0.4% in the third quarter, following decreases of 0.3% and 0.2% in the March and June 2008 quarters respectively, according to government figures.

“The impact of difficult trading conditions is showing through clearly in reduced export revenues, weak business sentiment, and sharply curtailed investment and employment,” Bollard said in Wellington today. He doesn’t expect rates to reach the near-zero policy seen in other countries, but didn’t rule out further, smaller cuts to the OCR not rule out future cuts, which will probably be much smaller.

Bollard expects New Zealand “to perform better through this period than many of our trading partners” due to the strong position of New Zealand’s banking sector, falling exchange rate, and early response to the global economic slump.

The New Zealand dollar has declined 35% in the past 12 months against the US dollar as the global economic crisis as the central bank slashed interest rates, eroding the yield appeal of riskier assets like the kiwi.

The sharp depreciation in the dollar will probably continue through until the middle of next year, with “heightened risk aversion” likely to push it lower in the near-term, the central bank forecast. The weaker currency is expected to lift exports, which are predicted to continue tumbling throughout the year.

Slumping global demand has slashed earnings for New Zealand companies and dimmed the outlook for 2009. The nation’s largest construction company, Fletcher Building Ltd., posted a 27% slump in first-half profit to $172 million, while second-quarter earnings at Telecom Corp., the biggest company on the NZX50 index, tumbled 92% to $14 million.

The central bank forecasts the jobless rate peaking at 6.8% early next year, and reaching 5.2% this year. That’s lower than the 7% rate some economists are predicting, and up from 4.6% currently, which is its highest level since 2002. “We expect to see sizeable reductions in employment and investment in the coming year,” Bollard said.

Domestic spending on credit and debit cards, excluding fuel and auto-related outlets, fell 0.4% in February, while fourth-quarter retail sales slid 0.6%, according to government figures. New Zealand consumer confidence tumbled last month, with Roy Morgan Research’s latest poll showing 63% of consumers expect the economy to deteriorate over the next 12 months, up from 60% in early February.

The price of raw materials sank for its seventh straight month, in a sign that weakening world growth is eroding demand for the nation’s exports. The ANZ Commodity Price Index fell 4.6% in February, following a 4.3% drop in the previous month.

Rising unemployment and falling corporate earnings has eroded government tax revenue, which was a lower-than-forecast $30.5 billion in the seven months to January 31. Treasury last month said the economy probably extended its recession into a fifth quarter.