The Reserve Bank of New Zealand on Thursday cut the Official Cash Rate (OCR) to 5 percent from the previous 6.5 percent, a reduction by 1.5 percentage points and the lowest in five years.

The New Zealand economy is in recession and is expected to keep shrinking until at least the middle of next year.

In a statement, Reserve Bank Governor Alan Bollard said the "ongoing financial market turmoil and the marked deterioration in the outlook for global growth have played a large role in shaping the decision."

"Activity in most of our trading partners is now expected to contract or grow only very slowly over the next few quarters," he said. "Economic activity in New Zealand will be further constrained as a result, compared with our view in October."

Bollard said it was appropriate to have delivered the reduction quickly to support the economy and keep inflation from falling below the target band of 1 to 3 percent.

"Inflation is abating here and overseas as a consequence of these developments. We now have more confidence that annual inflation will return comfortably inside the target band of 1 percent -- to 3 percent some time in the first half of 2009 and remain there over the medium term," said the central bank governor.

"However, we still have concerns that domestically generated inflation (particularly local body rates and electricity prices) is remaining stubbornly high," he added.

The central bank's decision on Thursday brings the cumulative reduction in the OCR since July to 3.25 percentage points.

(Xinhua News Agency December 4, 2008)