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29-01-2009

Interest rates cut to 3.5% - pass it on, says Bollard

NZHERALD

New Zealand now has the lowest Official Cash Rate since its introduction in March 1999, as Reserve Bank Governor Alan Bollard announced a 150 basis point cut.

This cut takes the OCR down to 3.5 per cent, a full percentage point lower than the previous bottom of 4.5 per cent when the rate was first introduced a decade ago.

Alan Bollard has again called on banks and financial institutions to pass on the reductions to their customers.

The money markets have been regarding a cut from 5 to 4 per cent as a near certainty and saw about a 50:50 chance that governor Alan Bollard would drop the rate to 3.5 per cent.

Since last July the Reserve Bank has lowered the OCR by a cumulative 475 basis points, dispensing ever-larger cuts as the flow of economic data, foreign and domestic, has worsened markedly.

In a press statement accompanying the announcement, Bollard said: "The news coming from our trading partners is very negative. The global economy is now in recession and the outlook for international growth has been marked down considerably since our December Monetary Policy Statement.

"Globally, there has been considerable policy stimulus put in place and we expect this to help bring about a recovery in growth over time. However, there remains huge uncertainty about the timing and strength of a recovery.

"The extent of the decline in global growth prospects and the ongoing uncertainty has played a large part in today's decision. We now expect the impact on New Zealand of these developments to be greater than we did in December, as a result of a more negative outlook for the terms of trade and exports, and tighter credit conditions."

Inflation pressures were abating, said Bollard. He said the bank had confidence that annual inflation would "be comfortably inside the target band of 1 to 3 per cent over the medium term".

"Given this backdrop it is appropriate to take the OCR to a more stimulatory position and to deliver this reduction quickly," he said.

"Today's decision brings the cumulative reduction in the OCR since July 2008 to 4.75 percentage points. Lower interest rates will have a positive impact on growth, alongside a lower exchange rate and fiscal stimulus, provided firms and households do not unnecessarily contract their spending."

Bollard again made the point that the bank expected financial institutions to play their part in the "economic adjustment process" by passing on lower wholesale interest rates to their customers.

"This will help New Zealand respond flexibly," said Bollard.

"Further movements in the OCR will be assessed against emerging developments in the global and domestic economies and the response to policy changes already in place. We would expect any further reductions to be smaller than those seen recently."

 

Combined Trade Unions economist Peter Conway said he expected the 1.5 percent cut but was concerned about Bollard's comments that there would not be another major drop.

"There is a real limit on what monetary policy can do but he should exhaust those limits," Conway said.

He said the Reserve Bank had to drop by 1.5 percentage points today and it still had enough room for further large cuts.

``The situation is that the economy needs significant stimulus,' said Conway.

Since the December review, when Bollard also cut by 150 basis points, economists' forecasts of growth among New Zealand's trading partners have been slashed, to the point where they are now expected to contract this year. Hopes for an export-led recovery are accordingly dashed.


Bollard's choice

* Today was Alan Bollard's third jumbo-sized interest rate cut in a row.

* Most market economists were expecting a full percentage point cut in the official cash rate to a new low of 4 per cent.

 * A couple were picking 1.5 percentage points. Why wait, they ask, when the end-point of the OCR is expected to be below 3 per cent?

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