New Zealand cut its benchmark interest rate on Thursday for the first time in five years and said further reductions were likely as it responded to fears the economy was at risk of sinking into a prolonged recession.

Alan Bollard, governor of the Reserve Bank of New Zealand, cut the rate from 8.25 to 8 per cent – a level that remains the highest in the industrialised world after Iceland – despite rising inflation, forecast to peak at 5 per cent by September.