By Tracy Withers
Sept. 10 (Bloomberg) -- New Zealand central bank Governor Alan Bollard will cut interest rates for the second time in seven weeks tomorrow as spending slows amid a recession, easing pressure on inflation.
The Reserve Bank will cut the official cash rate a quarter point to 7.75 percent, according to 13 of 14 economists surveyed by Bloomberg. One expects Bollard will lower the rate a half point when he announces his decision at 9 a.m. in Wellington.
Bollard cut borrowing costs in July for the first time in five years, and said further reductions are likely as the economy slows. The Treasury Department said this week the economy was in a recession in the first half of 2008 and may also contract in the third quarter amid a slump in housing investment and rising unemployment.
``The slowdown in the economy is well and truly entrenched and the inflation outlook has improved,'' said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. ``We continue to expect a cautious easing cycle.''
Bollard, 57, will cut the rate twice more this year, according to the economists surveyed by Bloomberg. The rate will be 6.75 percent by March, the lowest level since September 2005, they forecast.
The central bank will probably revise its forecast for the economy to show gross domestic product contracted in the second quarter, putting New Zealand in its first recession since 1998, said Tuffley. The economy shrank 0.3 percent in the first three months of the year.
Construction fell 5.8 percent in the second quarter, according to a Sept. 8 government report. Retail spending dropped 1.4 percent, the most in 13 years. The government publishes second-quarter GDP figures on Sept. 26.
The Treasury Department this week reiterated it expects the economy shrank in the three months ended June, and said it couldn't rule out a further contraction in the three months through September.
The decline in domestic demand was led by record-high credit costs and soaring food and fuel prices, which curbed consumer spending and stalled the housing market.
The jobless rate rose to a two-year high in the second quarter and hiring intentions have declined.
``The New Zealand economy stalled in the first half, reducing company profits, so employers became more hesitant in their hiring plans,'' Catherine Lo-Giacco, general manager of Manpower New Zealand, said in a report yesterday.
House prices fell 4.5 percent in August from a year earlier, according to the government valuation agency. That followed a 2.2 percent drop in July, the first decline since the series began in February 2005.
House sales fell to a 16-year low in June, before gaining in July as sellers lowered prices to complete deals, according to the Real Estate Institute.
While the economy stalls, high fuel and food prices have driven faster inflation. Consumer prices rose at the fastest pace in 18 years in the second quarter and the central bank forecasts the inflation rate will be close to 5 percent in the year to September.
``The Reserve Bank has no headroom and needs to limit the scope for flow-on into inflation expectations,'' said Robin Clements, chief New Zealand economist at UBS AG. ``There doesn't look to be a sense of urgency that would demand aggressive easing at this time.''
Bollard expects the inflation rate will slow to 3 percent by mid-2010. The central bank is required to keep average inflation between 1 percent and 3 percent.
Gasoline prices have slumped 8 percent since Bollard's July 24 rate cut, adding to signs inflation may have peaked.
Central bankers around the world are grappling with slowing economic growth while surging fuel and food prices fan inflation.
The Reserve Bank of Australia this month lowered its benchmark for the first time in seven years as economic growth weakens. Governor Glenn Stevens said this week it may be six months before inflation eases.
The European Central Bank last week kept interest rates unchanged at a seven-year high, citing inflation concerns even as the euro-region economy contracted in the second quarter. The Bank of England kept its rate steady after economic growth stalled in the three months ended June 30.
Following is a table of forecasts for New Zealand's cash rate at the next three reviews, and the target at the end of the first and second quarters next year.
Sept. Oct. Dec. March June
Median 7.75% 7.5% 7.25% 6.75% 6.75%
4Cast 7.75% 7.75% 7.5% 7.25% 6.75%
ANZ National 7.75% 7.5% 7.25% 7.25% 7.0%
ASB Bank 7.75% 7.5% 7.25% 6.75% 6.75%
BNZ 7.75% 7.5% 7.25% 6.75% 6.25%
Barclays 7.75% 7.75% 7.5% 7.25% 7.0%
Citigroup 7.75% 7.5% 7.25% 6.75% 6.5%
Deutsche 7.75% 7.5% 7.25% 6.75% 6.25%
First NZ 7.75% 7.5% 7.25% 7.25% 7.0%
Goldman Sachs 7.75% 7.5% 7.25% 6.75% 6.0%
JPMorgan 7.75% 7.5% 7.25% 6.75% 6.25%
Macquarie 7.75% 7.5% 7.25% 6.75% 6.5%
RBC 7.5% 7.25% 7.0% 6.5% 6.25%
UBS 7.75% 7.5% 7.25% 6.75% 6.75%
Westpac 7.75% 7.5% 7.25% 7.0% 7.0%