Jan. 29 (Bloomberg) -- New Zealand reduced its interest rate by 1.5 percentage points to a record low, saying there’s room for further cuts to steer the economy out of a deepening recession.

Reserve Bank of New Zealand Governor Alan Bollard trimmed the official cash rate to 3.5 percent in Wellington today, lower than most economists expected in a Bloomberg survey. “News coming from our trading partners is very negative,” he said. “It is appropriate to take the cash rate to a more stimulatory position and to deliver this reduction quickly.”

The New Zealand dollar fell to the lowest since 2002 as investors increased bets of a 100 basis-point cut in March after reports showed dairy exports fell and corporate tax revenue dropped. The Federal Reserve earlier left its key rate as low as zero and said it’s prepared to buy Treasuries as global policy makers try to resuscitate lending and revive their economies.

“They have done the right thing to move aggressively and temper the degree of this recession,” said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney. “They have probably still got more to do amid the deterioration in global growth.”

Bollard has pared borrowing costs by 4.75 percentage points since July, the most aggressive reductions behind Moldova among 54 central banks monitored by Bloomberg.

The International Monetary Fund yesterday said world growth will be 0.5 percent this year, the weakest postwar pace. That’s down from a November prediction of 2.2 percent. Exports are equivalent to 30 percent of New Zealand’s gross domestic product.

Dollar Drops

New Zealand’s currency fell to as low as 51.52 U.S. cents from 53.03 cents before the rate cut. It traded at 51.81 cents at 5:30 p.m. in Wellington. The NZX 50 index rose 0.8 percent to 2,770.12 as shares in manufacturers and builders gained.

The global expansion this year will come to a “virtual standstill,” said Olivier Blanchard, the IMF’s chief economist.

New Zealand’s trade deficit widened more than expected to NZ$5.62 billion ($2.9 billion) in 2008, the statistics bureau said. Dairy exports tumbled 12 percent.

Market participants expect interest rates “will go a little lower then trough and they may be correct in that,” Bollard said. “We would expect any further reductions to be smaller than those seen recently.”

Two of seven economists surveyed today expect the rate will be cut 100 basis points to 2.5 percent on March 12. Two forecast 75 basis points and three predict 50 basis points.

Recession Deepens

New Zealand’s economy slipped into a recession in the first quarter of last year amid a drought, soaring energy costs and a slump in the housing market. As the world’s largest economies contract, demand for exports is falling, prolonging the slump.

Bank of New Zealand Ltd., the nation’s third-biggest lender, forecasts the economy will contract 0.9 percent this year.

“The extent of the decline in global growth prospects and the ongoing uncertainty has played a large part in today’s decision,” Bollard said. “‘We now expect the impact on New Zealand to be greater than we did in December.”

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, yesterday cut its milk price forecast for the third time in four months and delayed paying a dividend.

“It’s clear now that the financial crisis is hitting the global economy hard, and dairy has been impacted along with most other commodities,” Chairman Henry van der Heyden said. “We are now taking a much more pessimistic view.”

Spending Slumps

Sales at Hallenstein Glasson Holdings Ltd., a clothing retailer, fell 4 percent in the four months ended Dec. 14. Outlays on credit cards fell for a third month in December, the longest losing streak on record, the central bank said this week.

Bollard called on lenders to “play their part in the economic adjustment process” by passing on lower funding costs to consumers and businesses. Kiwibank and Westpac Banking Corp. lowered their variable home-loan rates.

Today’s move takes the official cash rate to the lowest since the Reserve Bank began using the measure in March 1999 and matches Bollard’s record cut in December.

The economy is likely to stagnate in 2009, Prime Minister John Key said Jan. 15. The government is cutting income taxes for the nation’s 2.1 million workers on April 1 to revive demand.

The budget deficit exceeded government forecasts in the five months ended Nov. 30 as tax revenue declined, the Treasury Department said today.

The jobless rate rose to a five-year high of 4.2 percent in the third quarter. Air New Zealand Ltd., the nation’s biggest carrier, has been firing workers, and cookie maker Griffin’s Foods Ltd. last month closed a factory in Wellington.

Bollard, who is required to keep annual price gains between 1 percent and 3 percent, expects inflation will ease. Consumer prices climbed 3.4 percent last year.

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

Last Updated: January 28, 2009 23:30 EST