NZ can cut rates further: IMF

Last updated 16:34 26/03/2009

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The International Monetary Fund (IMF) called for New Zealand to lower interest rates further with the economy set to continue to contract sharply this year and inflation not a problem.

In a statement issued at the conclusion of a staff mission, the IMF said it expects the New Zealand economy to contract by 2 percent in 2009, with a gradual recovery over the medium term.

The Fund also warned about the country's high levels of external debt.

"A key vulnerability for New Zealand is the high level of short-term external debt, mostly owed by banks. So far, good credit ratings and the depreciation of the exchange rate have allowed banks to refinance their external debt," the IMF said in a statement released on Wednesday.

In January, rating agency Standard & Poor's cut the outlook on New Zealand's AA-plus foreign currency rating to negative from stable, partly due to deteriorating external finances.

"A low probability but high impact event would be a loss of investor confidence in banks or the sovereign," the IMF said. "This could lead to a further increase in the cost and/or reduced availability of external funding, which would require a more painful economic adjustment."

Data on Thursday showed annual current account deficit widened in the fourth quarter to nearly 9 percent of GDP on higher imports and a shortfall in investment income.

The IMF said New Zealand's high external debt constrained fiscal policy and could undermine investor confidence.

"In light of these concerns, there is very limited scope for additional fiscal stimulus beyond the sizable stimulus already in the pipeline," the statement said.

That was one reason the IMF felt monetary policy could do more.

"The Reserve Bank should continue to reduce the official cash rate," the report said. The Reserve Bank of New Zealand has so far cut its key rate by a total 525 basis points to a record low 3.0 percent.

The IMF agreed with the RBNZ that rates needed to be set at a level that still attracted offshore funds.

"However, the staff encourages the authorities to consider alternative instruments, including quantitative easing, and their potential efficacy in the unlikely event that such measures are needed," the IMF added.

The RBNZ cut rates by 50 basis points earlier this month, but Governor Alan Bollard said he did not expect New Zealand to see a near-zero rate policy like that adopted by other countries.

That led analysts to the view the end of the easing cycle was near.

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- Reuters

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