RBNZ cuts OCR by 150 bps to 5% on weaker growth, inflation outlook

The Reserve Bank of New Zealand has cut the Official Cash Rate by a record 150 basis points to 5%, citing a weaker outlook for economic growth and a significantly lower inflation forecast. The result was at the top end of economist expectations, although the balance of opinion had been shifting towards 150 basis points from 100 basis points in the last week and our poll of readers showed 150 basis points was the most popular pick. "Ongoing financial market turmoil and the marked deterioration in the outlook for global growth have played a large role in shaping today's decision," said Reserve Bank Governor Alan Bollard. "Activity in most of our trading parners is now expected to contract or grow only very slowly over the next few quarters," Bollard said. "Economic activity in New Zealand will be further constrained as a result, compared with our view in October," he said. The Reserve Bank forecast annual average GDP growth would trough at -0.2% in the middle of 2009 before rising to 1.3% in March 2010 and 4.3% in March 2011. This is a longer and deeper recession forecast than the Reserve Bank projected in September. Meanwhile, the inflation outlook was also lowered substantially. The Reserve Bank now expects annual inflation to "return comfortably inside the target band of 1-3 percent some time in the first half of 2009 and remain there over the medium term." Although Bollard did say he was still concerned about a stubbornly high level of domestically generated inflation being generated by local bodies with rate increases and power companies with price increases.