New Zealand’s Aggressive Rate Cuts Fail to Shake Off Recession

Jan. 28 (Bloomberg) -- New Zealand, which has cut interest rates by more than almost any other nation in the past six months, may face another year of recession as the deepening global slowdown reduces exports of meat, wool and timber.

Reserve Bank Governor Alan Bollard will lower the official cash rate by 1 percentage point to 4 percent tomorrow, according to economists. That would bring total reductions since June 30 to 425 basis points. Among 54 central banks monitored by Bloomberg, only Moldova will have cut rates by more.

Lower borrowing costs have failed to spark the economy, which slumped into a recession in the first quarter of last year and may not resume growing until 2010 according to government forecasts. Economists predict Bollard will cut the rate to 3 percent by June and even then the recovery hinges on a revival in global demand to spur exports and revive business confidence.

“We can kick-start the domestic economy but the world is in a recession no matter what we do,” said Nick Calavrias, managing director of Wellington-based Steel & Tube Holdings Ltd., which sells wire and roofing iron to the construction industry. “We can’t create demand if it’s not there.”

Prices of New Zealand’s export commodities plunged 24 percent last year and may drop further, according to ANZ National Bank Ltd. Overseas shipments are equivalent to about 30 percent of New Zealand’s $130 billion economy.

Westpac Banking Corp. forecasts the New Zealand economy will shrink 1.3 percent this year.

Global Rates

Ten of 13 economists surveyed by Bloomberg News last week predict Bollard will cut the benchmark rate to 4 percent, the lowest since the benchmark was introduced in March 1999, at 9 a.m. in Wellington tomorrow. Three expect a 1.5 point reduction.

Central banks around the world are paring rates and governments are stepping up stimulus measures amid fallout from the financial crisis that has sent the U.S., Europe and Japan into a recession. Moldova’s National Bank has cut rates by 6 points since June 30 to 12.5 percent.

Australia’s central bank may lower its target rate to 3.75 percent next week, taking rate cuts since June 30 to 3.5 percentage points, according to a survey of economists. The Bank of England is expected to trim its benchmark rate to 1 percent on Feb. 6, a 4 percentage-point reduction since June.

New Zealand’s dollar has slumped 30 percent in the past 12 months, the second-worst performer of 16 major currencies, as the recession and lower interest rates curb investor demand.

Bollard should cut rates further to bring down the exchange rate and bolster exports, said John Walley, chief executive of the New Zealand Manufacturers and Exporters Association.

Big Move

“The sooner interest rates come down and the speculative pressure comes off exchange rates, the sooner the recovery can start,” he said. “Given our economic forecasts darken by the day, a cut of 2 percentage points is justified.”

Still, Bollard may resist business calls for a deeper reduction to leave room for further easing later in 2009, according Darren Gibbs, chief economist at Deutsche Bank AG.

“It’s clear the cash rate needs to be much lower” to set the foundations for a recovery, Gibbs said in Auckland. Still, “the bank may wish to conserve ammunition for later in the year if the global economy proves less responsive to monetary and fiscal stimulus than policy makers are hoping.”

Falling exports have damped company earnings and prompted businesses to cut workers, leading to a slowdown in consumer spending. The jobless rate rose to a five-year high of 4.2 percent in the third quarter.

Economy Darkens

The outlook for corporate profits slumped to the weakest in 26 years last quarter, according to a survey by the New Zealand Institute of Economic Research Inc. published Jan. 13. The number of companies that expect to reduce their workforce rose to the highest since 1991, the polled showed.

Spending on credit cards fell for a third month in December, the worst slump on record, the central bank said this week.

The government is cutting income taxes and next month will unveil a program of school, road and home building. Still, there’s a limit to the amount of stimulus that can be undertaken amid a widening budget deficit and growing foreign debt, Finance Minister Bill English said.

“We have to get the right balance between stimulus to the economy and the debt that’s incurred funding it,” he said in a Jan. 21 interview. Standard & Poor’s revised the outlook on the nation’s AA+ credit rating to negative this month, citing rising external debt.

With a limit on fiscal stimulus, the government expects Bollard to help by reducing borrowing costs.

“I would agree with the governor’s statements that the Reserve Bank has more room to move on rates than most other central banks,” English said, adding the central bank will probably take “decisive action.”

In New Zealand, Bollard sets interest rates independently of government direction.