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New Zealand Would Need Rate Cut If Euro Area Splits, NZIER Says

New Zealand’s central bank would need to lower the official cash rate if the euro region splinters, the New Zealand Institute of Economic Research said, citing a one-in-four chance of such a scenario.

“If the euro area splits, New Zealand firms should prepare for another global crisis,” Shamubeel Eaqub, principal economist at the Wellington-based organization, said in a report today. “New Zealand would likely experience another recession and the Reserve Bank would need to cut interest rates.”

New Zealand’s benchmark rate is already at a record-low 2.5 percent and should be left at that level until mid-2013 even if a political solution is found in Europe, Eaqub said. The economy will likely grow 1.5 percent in 2012, less than the 2.6 percent pace forecast in August, amid weakened domestic demand, exports and investment, according to the institute’s quarterly predictions.

“There is little domestic demand growth,” Eaqub said. “Households are saving, the housing market is struggling, businesses are cautious about investing and the government is in a period of fiscal consolidation.”

The central bank doesn’t need to be concerned about inflation accelerating because an elevated unemployment rate will keep a lid on wage growth and companies will hold prices to remain competitive, he said.

ANZ National Bank Ltd. and ASB Bank Ltd. this week said central bank Reserve Bank Governor Alan Bollard is likely to keep rates unchanged until December next year. Previously they forecast an increase in June.

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