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New Zealand central bank cuts interest rate to 5 per cent

Business Materials 4 December 2008 01:18 (UTC +04:00)

New Zealand's central bank slashed its benchmark interest rate on Thursday by a record 1.5 per cent to 5 per cent, the fourth cut since July after five years with no reductions, dpa reported.

Reserve Bank Governor Alan Bollard cited "ongoing financial market turmoil and the marked deterioration in the outlook for global growth" as the main factors for taking the rate down to its lowest level in five years.

The bank had eased its official cash rate to 8 per cent on July 24 after keeping it at 8.25 per cent - one of the highest rates in the developed world - for 12 months in a bid to contain inflation.

It was reduced again to 7.5 per cent in September and then by a record 1 per cent to 6.5 per cent in October.

The cut was widely expected to stimulate the economy, which is technically in recession after contracting in each of the three quarters of this year.

Farmers and manufacturing organisations had called for at least a 1.5 per cent reduction, or even 2 per cent, citing the lower interest rates prevailing in all New Zealand's main trading partners.

Bollard said activity in most trading partners was expected to contract or grow only very slowly over the next few quarters, further constraining economic activity in New Zealand.

Although the consumer price index rose 5.1 per cent in the year to September, Bollard said inflation was abating and he expected it to return comfortably inside the bank's target band of 1 to 3 per cent in the first half of next year and remain there over the medium term.

Noting the cuts totalling 3.25 per cent in the interest rate since July, Bollard said this took monetary policy to an expansionary position and it was appropriate to support the economy and keep inflation from falling below the target band.

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