March 12 (Bloomberg) -- New Zealand’s central bank cut its benchmark interest rate by half a percentage point to a record- low 3 percent to help steer the economy out of it worst recession in more than 30 years.

“The combined effects of a weakening domestic housing market and the global financial and economic crisis are weighing heavily on the economy,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today. Interest rates are “very stimulatory” and should help the economy to start growing in the third quarter, he said.

New Zealand’s dollar rose to a two-week high as Bollard signaled he will slow the pace of rate cuts after slashing borrowing costs by 5.25 percentage points since July. Record-low rates haven’t yet bolstered consumer spending or the housing market, while exports are being buffeted by a global recession that the World Bank says will be the worst since World War II.

“They’ve sent a clear message they’re going to relax on the pace of further easing,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “They’re looking at the second half of the year and suspect there will be a recovery.”

New Zealand’s dollar rose to 51.38 U.S. cents at 11:15 a.m. in Wellington trading from 50.59 cents immediately before the decision.

The Reserve Bank’s projected decline in three-month bank- bill yields implies the low point for the official cash rate will be 2.5 percent, Bollard told reporters.

More Cuts

“Were the economy to have more bad news, it’s not inconceivable it could go lower, like 2 percent,” he said. “But to go much below that we think would be unlikely, unusual and would have some undesirable effects. We do not expect to see in New Zealand the near-zero policy rates of some countries.”

The European Central Bank cut its rate to 1.5 percent last week and the Bank of England lowered its benchmark to 0.5 percent. Benchmark rates in Japan and the U.S. are close to zero.

Warehouse Group Ltd., the nation’s biggest discount retailer, today said first-half profit fell 24 percent amid a drop in sales. The retail environment will “continue to be challenging,” Managing Director Ian Morrice said in an e-mailed statement.

Sealord Group Ltd., the nation’s biggest fishing company, said last week it will fire 180 workers and Pacific Brands Ltd. announced the closure of two New Zealand clothing factories with the loss of 98 jobs.

Deepening Recession

Seven of 13 economists surveyed by Bloomberg News forecast today’s move. Three expected a three-quarter point reduction and three a 1 point easing.

New Zealand’s economy is in its fifth quarter of recession amid a deepening global downturn that has curbed exports and business investment, the central bank said today. The recession will probably extend into a sixth quarter, the longest since 1977 when the economy shrank for eight quarters, it said.

The World Bank forecast this week that international trade will decline by the most in eight decades. The economies of New Zealand’s 14 largest trading partners will contract 1.8 percent this year, the central bank said. That compares with 1.1 percent growth expected in December.

In the face of a global recession, exports are slowing, companies are firing workers and consumers have cut spending. Bollard, 57, is cutting borrowing costs while the government lowers income taxes and plans road and school building programs to save jobs and stimulate demand.

Consumer Confidence

The stimulus hasn’t had immediate results. Spending on debit and credit cards, excluding fuel purchases, fell for the second straight month in February, a report showed this week. Consumer confidence dropped in February, according to a poll by Roy Morgan Research.

Variable home-loan interest rates at a seven-year low haven’t sparked interest in the property market. Home-building approvals slipped to a record in January and house prices slumped 8.9 percent in February from a year earlier.

Business confidence was near a record low in February with 21 percent of firms saying profits will fall. Commodity prices plunged 31 percent in February from a year earlier, curbing exports, which make up 30 percent of the economy.

The unemployment rate could rise to an 11-year high of 6.8 percent by early 2010 from 4.6 percent at the end of 2008, Bollard forecast today. Some economists say the jobless rate could reach 8 percent. Bollard said companies are likely to reduce working hours rather than fire workers.

Bollard, who is required to keep average price gains between 1 percent and 3 percent, expects the annual inflation rate will slow to 0.7 percent by the third quarter.

“Further house-price falls and increased precautionary saving by households are driving a weakness in spending,” he said. “Inflation pressure is abating rapidly as a result.”

Inflation will be 1.6 in the year to March 31, 2010, and 2.2 percent a year later, the central bank said.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

Last Updated: March 11, 2009 18:37 EDT