New Zealand tax rates cut by 1 per cent

23 October 2008

Source: NZ Herald

Reserve Bank Governor Alan Bollard has done what most expected this morning and cut the Official Cash Rate by a full one percentage point to 6.5 per cent.

This is the steepest cut since the OCR was introduced in March 1999 and a response to the gravity of the international credit crisis.

Inflation currently is running at 5.1 per cent - a rate not seen for 18 years, but Bollard’s usual concern with inflation has been replaced by a much bigger concern - the impact of the global financial crisis.

Since Bollard surprised the market with a 50-basis-point cut in the OCR six weeks ago, what was a credit crunch has turned in a full-blown global crisis.

Oil price have fallen considerably since then, with most economists expecting inflation to have peaked. Today’s cut is an attempt to kick-start the economy, by freeing up the money supply.

The Reserve Bank is required to keep inflation within 1-3 per cent over the medium term, and expects high inflation pressures to ease rapidly among slowing local and global economies.

The official cash rate had been held at 8.25 per cent for a year until easing started in late July.

Bollard is likely to have been cutting rates this month anyway, but the global crisis meant that last time he cut by 50 basis points - more than most expected and today by such a large amount. He says he has “plenty of room” to cut.

Whether the trading banks move quickly to cut their mortgage rates is yet to be seen. Despite the unexpectedly big 50 basis point cut six weeks ago, there has not been much movement on mortgage rates.