Reserve Bank Governor Alan Bollard has announced a 50 basis point cut in the Official Cash Rate (OCR) to 2.5% and said he expected to keep the OCR "at or below the current level until the latter part of 2010." (Update 2 includes response from ANZ economists.) Bollard said the global economy had worsened since the Reserve Bank's most recent forecasts in the Monetary Policy Statement on March 12, and the inflation outlook was lower. "We consider it appropriate to provide further policy stimulus to the economy," Bollard said in a statement. "The OCR could still move modestly lower over the coming quarters," he said. The rise in long term interest rates since March 12 and the slight rise in the New Zealand dollar had produced an "unwarranted tightening in financial conditions."
"While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced," he said. The expected repricing of fixed mortgages on to lower rates over the coming quarters would boost the economy, along with the already announced fiscal stimulus from the government. "However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels." Economists respond ASB economists said that the content of Bollard's statement delivered no surprises, as "the RBNZ did not waste time and selected one of the more effective options available to them today", by cutting the OCR by both 50 bps and committing to keep it low through 2010. "In explicitly promising to hold the OCR at or below current levels until the second half of 2010, the RBNZ will contain longer-term interest rate expectations and prevent an unnecessary tightening in monetary conditions before the economic recovery has found its feet," ASB economists Nick Tuffley and Jane Turner said. "In addition, signalling that further rate cuts are possible will mitigate the rush of borrowers looking to fix rates, and prevent a repeat of late March/ Early April," they said. Tuffley and Turner said they expect the Reserve Bank to cut the OCR by 25 basis points in both June and July, which would take it to 2.00%. ANZ economists said they expect a further 25 bp cut in June but that "the ultimate endgame for the OCR will be partly dependent on what sort of adjustment we see in the currency over the coming months." "In our view, today's assessment and commentary is about as clear as central bank communication could possibly be," ANZ economists said. "Policy is attempting to remove the temptation for the market (via pricing in rate hikes in 2010) to preempt the recovery. Term wholesale rates should be lower. It's a timely reminder that the NZD is not a one way ticket higher, and equally a signal to borrowers not to panic. Get used to a positive sloped yield curve, and target favourable short-term rates as opposed to rushing in to fix," they said. See our mortgage rates page here. For term deposit rates less than one year, see here. For term deposit rates one year and more, see here.
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