New Zealand's central bank has cut interest rates for the first time in five years, saying the slowing economy would curb persistent inflationary pressures.
Reserve Bank of New Zealand Governor Alan Bollard on Thursday cut the official cash rate by a quarter percentage point to 8.0 per cent in the first cut in rates since July 2003 and said further reductions were likely.
Bollard acknowledged continuing price pressures would see inflation reach an expected high of around 5.0 per cent in the September quarter but he expected it to return to the central bank's target range of one to three per cent in the medium term.
Inflationary pressures have been the main factor in discouraging the central bank from cutting rates this year, but he said the economic slowdown made it less likely inflation would become entrenched.
"The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed," Bollard said.
Bollard said a worsening international situation meant there was a risk that the domestic New Zealand economy would slow further and it was costing local banks more to raise funds overseas because of the global credit crunch.
"Today's cut will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households," he said.
"Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the official cash rate further," he said.
