New Zealand has joined the ranks of the US, UK, and EU in concerns over growth. In an unexpected move New Zealand cuts rates on fears of drawn-out recession.

New Zealand yesterday cut its benchmark interest rate for the first time in five years and said further reductions were likely as it responded to fears the economy was at risk of sinking into a prolonged recession.

Alan Bollard, governor of the Reserve Bank of New Zealand, cut the rate from 8.25 per cent to 8 per cent – still the highest in the industrialised world after Iceland – despite rising inflation, forecast to peak at 5 per cent by September.

Economists said the New Zealand authorities were acting aggressively and taking a gamble in looking through the worsening inflation picture and cutting rates to prevent the economy weakening further.

The move surprised many as it contradicts the Reserve Bank’s mandate, which states that achieving and maintaining price stability are the sole objectives of monetary policy. The central bank’s stated inflation target band is 1 to 3 per cent.

Like the US and parts of Europe, New Zealand is grappling with rising inflationary pressures, a housing market correction and its economy has suffered from the higher cost of capital on world financial markets. “The cost of funds raised abroad by banks has been rising in recent months as the international financial situation has deteriorated,” Mr Bollard said. “Today’s cut will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households.”

The New Zealand economy is already in recession, according to economists. It contracted by 0.3 per cent in the first quarter with a further negative result for the second quarter widely expected when figures are published later this year.

Joshua Williamson, a senior strategist at TD Securities, said the bank “has now realised that the growth outlook in New Zealand is more dire than previously thought”, adding that a third-quarter contraction of the economy was possible.

Worldwide Recession Coming

A worldwide recession is coming. China, India, Brazil, and third world economies simply cannot pick up the slack for the US, UK, EU, and now New Zealand. For more on the situation in the US and UK please see Deflationary Hurricanes to Hit U.S. and U.K.

Admittedly New Zealand is just a tiny cog in the global economy. Nonetheless it offers confirmation of things seen elsewhere.

Australia and Canada will follow in a mind boggling drop once the air is let out of the China commodities balloon. Brace for a worldwide hard landing. One is coming.

Mike “Mish” Shedlock
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