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04-12-2008

Interest rates slashed to 5pc, banks cut floating rates

NZHERALD

The Official Cash Rate axe has swung again, with Reserve Bank Governor Alan Bollard cutting official interest rates by 150 basis points - a 1.5 percentage point cut leaving the rate at 5 per cent.

A cut of this scale would have been unimaginable just 12 months ago, but the past year has been one that few but the gloomiest of pessimists could have expected. The previous OCR was 6.5 per cent.

Reaction has been swift, with the ASB Bank announcing a cut to its variable mortgage rate from 8.7 per cent to 7.95 per cent. SBS Bank dropped its floating home rates by 1.95 percentage points, taking it down to 7.2 per cent.

A 1.5 percentage point cut is the biggest since the OCR was introduced in 1999. It follows on from the previous record cut - one percentage point - in October this year. The OCR has not been this low since December 2003.

Reserve Bank Governor Alan Bollard said this morning that "ongoing financial market turmoil and the marked deterioration in the outlook for global growth have played a large role in shaping today's decision".

He said: "Activity in most of our trading partners is now expected to contract or grow only very slowly over the next few quarters.

"Economic activity in New Zealand will be further constrained as a result, compared with our view in October."

Inflation was abating in New Zealand and overseas as a consequence of these developments, so the bank now had more confidence that it would return "comfortably" inside the target band of 1 to 3 per cent some time in the first half of next year.

"However, we still have concerns that domestically generated inflation (particularly local body rates and electricity prices) is remaining stubbornly high," Bollard said.

Today's decision meant monetary policy had been taken to "an expansionary position. "

"Given recent developments in the global economy, the balance of risks to activity and inflation are to the downside. Thus it is appropriate to deliver this reduction quickly to support the economy and keep inflation from falling below the target band," said Bollard.

To get the response the Reserve Bank wanted, Bollard said he expected financial institutions to "play their part" and pass on the lower rates.

Today's cut of 150 basis points is, said ASB economist Nick Tuffley, "the path of least resistance", since it was widely expected by the market.

The next scheduled OCR announcement is on Thursday, January 29.

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