New Zealand's economy contracted in the first quarter, putting the nation on the brink of its first recession since 1998, as drought, a slumping housing market and rising credit costs stall spending. Bollard says inflation will return below the 3 percent limit of his target range within two years.
New Zealand's dollar fell to a six-month low of 74.30 U.S. cents from 75.02 cents immediately before the statement. The currency, which dropped 2.7 percent in the seven days before the decision, bought 74.44 cents at 9:55 a.m. in Wellington.
The yield on a three-year benchmark bond fell 12 basis points to 6.11 percent. A basis point is 0.01 percentage points.
Bollard had kept the official cash rate at 8.25 percent, the highest of any nation with an Aaa credit rating, since July last year. Today's is the first rate cut since July 2003.
While official rates have been unchanged the past year, local banks have been raising borrowing costs as they have had to pay more for credit overseas.
Today's rate cut ``will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households,'' Bollard said.
Central bankers around the world are grappling with slowing economic growth while surging fuel and food prices fan inflation. Consumer prices in the U.S. surged 5 percent in the year through June, the biggest jump since 1991, and in Europe they climbed 4 percent, the fastest pace in more than 16 years.
Bollard was under pressure to cut interest rates to help New Zealand avoid a prolonged recession. Gross domestic product contracted 0.3 percent in the first quarter.
Sales of houses slumped for a fourth straight month in June and prices fell, the Real Estate Institute said on July 11. Consumer confidence fell to a record low in the two weeks ended June 29 because of the threat of recession, according to a survey by research firm Roy Morgan.
Slowing sales are eroding earnings at retailers such as Hallenstein Glasson Holdings Ltd., which said on July 10 that full-year profit will fall at least 28 percent. The clothing retailer became the third New Zealand store owner to cut earnings forecasts in two weeks.
New Zealand's biggest trade union said last week companies will face demands for higher wages as food and fuel prices soar.
The jobless rate was 3.6 percent in the first quarter, the sixth-lowest of 27 economies in the Organization for Economic Cooperation and Development that use standardized rates.
Consumer prices rose 4 percent in the year ended June 30, the fastest annual pace in two years.