12 March 2009

Source: NZ Herald

10:30AM Thursday Mar 12, 2009

New Zealand’s official interest rate has been cut to 3 per cent from 3.5 per cent, and Reserve Bank Governor Alan Bollard has warned that the timing and extent of global recovery remain “highly uncertain”.

Today’s cut of 50 basis points in the official cash rate (OCR) takes the overall reduction to 525 basis points in little more than six months as the global economy deteriorated rapidly.

But Bollard indicated that the days of big cuts to the OCR are now over.

“As economic activity troughs, we expect the rapid easing of monetary policy to slow,” he said today.

“Any future cuts will be much smaller than observed recently. We do not expect to see in New Zealand the near-zero policy rates of some countries. New Zealand needs to retain competitiveness in the international capital markets.

“We will assess the need for further cuts in the OCR against emerging developments in the global and domestic economies and the responses to policy changes already in place,” Bollard said.

While monetary and fiscal policy responses in many countries to the rapid deterioration in the world economy had been substantial, the Reserve Bank expected the adverse economic forces generated by the crisis to be dominant throughout 2009.

In this country export revenues were down, business sentiment was weak, and investment and employment sharply curtailed.

Further house price falls and increased precautionary saving by households were driving a weakness in spending, and inflation pressure was abating rapidly, Bollard said.

Further falls in the lending rates faced by households and businesses were in the pipeline.

“While credit growth is easing in line with the weak economy, we expect financial institutions to continue lending on sound business propositions, to support the recovery.”

The New Zealand economy would be supported by the substantial cuts in interest rates, the large amount of government stimulus, and the sizeable exchange rate depreciation, said Bollard.

The Reserve Bank expected to see activity troughing in the middle of this year and then gradually picking up after that.

“However, the scale of the global financial crisis is such that there is great uncertainty about future economic developments and there is a risk that the recovery may occur later and be more protracted than we anticipate.”

ASB economist Jane Turner said the cut “slightly disappointed the market” and was less than the ASB prediction of a 100 point cut.

The Reserve Bank was now sending a strong signal that it did not want to cut the OCR by much more, said Turner.

“The key was in the last paragraph of the statement, the RBNZ again emphasized future cuts will be significantly smaller and “We do not expect to see in New Zealand the near-zero policy rates of some countries. New Zealand needs to retain competitiveness in the international capital markets,” she said.