New Zealand Should Cut Interest Rate to 2%, OECD Says
Written on April 18, 2009
New Zealand’s central bank should cut interest rates to as low as 2 percent to help the economy recover from a recession, according to the Organization for Economic Cooperation and Development.
“The Reserve Bank still has room to go further in responding to deteriorating economic conditions,” the OECD said in its Economic Survey of New Zealand, released in Paris today. “The much-improved inflation outlook allows scope for further easing.”
Central bank Governor Alan Bollard last month cut the official cash rate to a record-low 3 percent and said it would be “undesirable” to lower borrowing costs any further than 2 percent. The economy will be in recession throughout 2009 and will recover “only hesitantly” in 2010, the OECD said.
“As a small economy on the world’s periphery, New Zealand is affected by the sharp decline in world trade, which is unlikely to be reversed during 2009,” it said.
Gross domestic product may shrink 2.9 percent this year amid a contraction in consumer spending and investment, the OECD said. Growth will be 0.5 percent in 2010, it forecast.
Bollard has lowered the benchmark interest rates by 5.25 percentage points since July, and the government has cut income taxes and increased spending on roads and schools to kick-start demand online cash loans.
Credit Rating
New Zealand’s dollar bought 57.44 U.S. cents at 5:27 p.m. in Wellington trading from 57.57 cents immediately before the report was released.
“Heightened risk around the sovereign credit rating due to a projected sharp rise in indebtedness implies that there is little room for further fiscal expansion,” the OECD said.
Eight of 10 economists surveyed by Bloomberg News say Bollard will lower the official cash rate by a half-point to 2.5 percent at his next review on April 30. Two expect a quarter- point reduction.
Bollard should reduce the rate to a low as 2 percent and then should keep borrowing costs low for some time, the OECD said.
“It will be important to ensure that the eventual recovery is firmly established before material amounts of monetary stimulus are withdrawn,” it said.
“The twin challenges will be to avoid moving too soon and stalling the recovery as against keeping policy too loose, leading to a strong pickup in inflation.”
Filed in: business.