Good news - I hope it us a full 1% too!

The sad fact is that the lower interest rates will again divert investment to unproductive housing rather than to productive manufacturing sectors. This is going to further delay private debt reduction, and hence big interest increases will follow soner than later. The duality of NZ economy does not let us take a middle ground. Lower interest rates and NZD helps a part of the society but not all. What is needed is the stablity in interest rates rather than volatality. RBNZ causes this volatality more than the market forces defeating the very purpose of the OCR instrument.

What exactly does the RBNZ think further interest cuts are going to achieve? The big banks have made it abundantly clear at the recent jobs summit that their business lending rates are largely independent of the OCR at times of perceived high economic risk. Mortgage rates aren't - but reinflating the housing market right now is clearly a dumb idea ( we just get ourselves further into unpayable debt with our aussie-owned high street banks). Theres still ~ 14month lag time before current mortgage-holders can roll over - so theres still a significant amount of stimulus to be seen from the recent heavy cuts. There is a case to be made that the heavily indebted have been "rescued from themselves" to a sufficent degree.

The reality is NZ is currently stagflating, (-ve GDP, inflation above RBNZ target level for the entirety of 2008) and an even lower OCR rate runs the risk of making this a whole lot worse. All this worry about global deflation (yup the US, Japan and europe may well have aproblem with this) is tantamount to "playing the man not the ball". NZ is a tiny rock in the middle of the pacific which has the good fortune to have a fiat currency of its own, that at the moment the rest of the world is willing to trade in. Given the relative trade volume in NZ$, that "currency trust" is fragile, and is in part supported by the risk premium the RBNZ pays with its above average OCR. If global confidence in our currency disappears, then NZ= Iceland. End of story....

A better course of action for the RBNZ would be to rapidly fix the enormous disparity between high street business lending rates and the OCR. That might require Bollard and English to talk to to each other a bit - but there is a govenrment owned bank out there already that could act as the conduit....