RBNZ Governor Allan Bollard said the "marked slowdown" being experienced by the New Zealand economy is being led primarily by the household sector and that the turmoil in financial markets has deteriorated the outlook for the global economy.

Bollard said that while domestic activity is expected to pick up later in the year as a result of "personal tax cuts, increased government spending and rising rural incomes," he still expects a prolongued period of household sector adjustment and "below-average growth." He also said the country's business sector is coming under pressure from rising costs and weakening demand.

With regards to inflation, Bollard said weak economic activity is likely to translate into lower inflation pressures int he medium term, but that headline inflation can be expected to peak at around 5% in the September quarter before trending down.

Nevertheless, he said high food prices, higher wage costs and depreciating currency will keep headline inflation elevated through 2009.

"With medium-term inflation pressures expected to ease, it is appropriate to move towards a less restrictive monetary," Bollard said.

"We believe this response is warranted in light of the tightness of current credit conditions and the time it will take to affect the actual interest rates faced by households and businesses."

Looking ahead, he said, "the scale and timing of further official cash rate reductions will depend on signs of declining inflation pressures and on exchange rate adjustments."

Shortly following the report, the New Zealand and Australian dollars fell sharply against the U.S. dollar.

By Megan Ainscow, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it

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