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The Reserve Bank has pushed official interest rates to their
lowest level in five years, slashing them by a remarkable 1.5
percentage points to 5%.
The central bank has presented a grim picture of the economy caught
up in global financial turmoil, while sounding largely relaxed
about inflation risks, as well as indicating that Thursday's
interest rate decision will be the last big cut.
Reserve Bank Governor Dr Alan Bollard says ongoing financial market
turmoil and a marked deterioration in the outlook for global growth
played a large role in Thursday's decision.
He says activity in most of New Zealand's trading partners is
expected to contract or grow only very slowly in the next few
quarters, meaning economic activity in this country will be further
constrained than the Reserve Bank thought it would be in
October.
In a clear message to lenders, Bollard says the Reserve Bank
expects financial institutions to play their part in the economic
adjustment process by passing on lower wholesale interest rates to
their customers.
Bollard says the Reserve Bank acknowledges that recent falls in
wholesale interest rates have resulted in "markedly" lower mortgage
interest rates offered to new borrowers and households re-pricing
existing debt.
Thursday's decision brings the cumulative reduction in the official
cash rate (OCR) since July to 3.25 percentage points.
Bollard says it is appropriate to have delivered the reduction
quickly to support the economy and keep inflation from falling
below the target band of 1% to 3%.
Annual inflation hit 5.1% in the September quarter, underpinned by
high petrol and food price inflation, but the Reserve Bank now
expects it to decline markedly.
Some time in the first half of 2009 annual inflation is expected to
return comfortably inside the target band and to stay there for the
medium term, Bollard says.
Recent petrol price declines are expected to help drive annual
headline inflation to briefly fall to 1.6% in the September quarter
of next year, the Reserve Bank says in its December Monetary Policy
Statement (MPS) published on Thursday.
Despite that, the Reserve Bank continues to have concerns about
domestically generated inflation, due particularly to electricity
prices and local body rates.
"Balancing the various risks around the outlook, we assess some
further, but significantly smaller, reductions in interest rates
may be warranted beyond the current policy decision," the MPS
says.
Prices for several of New Zealand's commodity exports have fallen
significantly and are likely to fall further, it says.
New Zealand-based banks and large firms are also finding it
difficult to access traditional overseas funding sources as well as
paying a higher margin for what they could get, the MPS says.
"Both of these forces will act to lower growth and inflation," it
says.
Gross domestic product is expected to have contracted further in
the September quarter, the third consecutive quarterly decline, and
further quarters of negative growth in early 2009 are "quite
possible", it says.
Employment is expected to decline in the coming year and then show
only sluggish growth, the MPS says.
Despite that, the Reserve Bank is expecting the unemployment rate
peak to be "quite modest" relative to previous cycles, reaching 6%
by the end of 2009 before declining.
That is because of the current low level of unemployment, along
with muted net immigration going forward.
But the MPS also says that while the Reserve Bank expected sizable
declines in employment and investment, "even sharper adjustments
are possible".
The number of tourists visiting New Zealand is expected to decline
further in the coming year, although the near-term outlook for
merchandise exports was less clear, it says.
Assuming the weather remains favourable, dairy export volumes are
likely to continue to recover from last season's drought-inhibited
levels, but meat export volumes were expected to decline as farmers
looked to rebuild depleted breeding stocks, the MPS says.
Forestry export volumes are likely to continue to be inhibited by
weak housing construction in most countries, it says.
Go to the Reserve bank website for its Monetary Policy Statement webcasts
