New Zealand yesterday cut its benchmark interest rate 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 per cent to 8 per cent - still the highest in the industrialised world after Iceland - despite rising inflation, forecast to peak at 5 per cent by September.