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Source: ONE News -
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The Reserve Bank is set to announce whether to cut record low interest rates even further, or whether to pause on cuts for the first time in almost a year.
The official cash rate has been slashed by 575 basis points since last July and currently sits at 2.5%.
Opinion among economists is divided on whether the bank should continue cutting the official cash rate (OCR).
Some economists believe a cut is necessary given the rising currency and falling export prices, but others say a cut is largely futile and will do nothing to help bring down interest rates at the moment.
Council of Trade Unions economist Bill Rosenberg says the main focus for the bank will be "heading off the economic storm" that is approaching as exporters feel the pinch of a rising Kiwi dollar, production slumps and unemployment rises.
However, he says the OCR's ability to address all problem areas is limited.
"We think it's valuable to cut it a bit, both as a signal to the business community and that banks that the banks need to do more here. But it's certainly true that the cash rate is becoming less and less potent in doing its job of affecting longer term interest rates,"
Banks have been criticised for not passing on OCR cuts in full to borrowers. However, New Zealand's largest bank ANZ National says the OCR is no longer an indicator of lending rates.
It says longer term interest rates are affected more by external influences such as the price of borrowing offshore.
Infometrics economist Gareth Kiernan says an issue for Bollard will be the rising Kiwi dollar and is picking a 0.25% cut to the OCR.
"When you look at the currency over the last three months or so...and it's gone up around 20% from where the Reserve Bank was expecting. That's a really big hit to the New Zealand economy and indeed the potential for any export led recovery," he says.
Farmers looking for relief
Federated Farmers have added to the debate, saying farmers' overdraft interest rates have come down but did not reflect cuts to the OCR.
A recent interest rates survey revealed farm business overdraft interest rates fell an average of 2.68 percentage points since December last year, while the OCR was been cut by 4 percentage points.
More than 225 Federated Farmers members responded to the survey, which was conducted between 26 May and 2 June 2009.
Federated Farmers spokesman Phil York says it makes no difference if the OCR was cut on Thursday or not; "the real issue is, when will these cuts filter through to farm businesses?
"Add to this the drop in milk powder prices, the rise of dairy subsides off shore and high on-farm inflation costs and it becomes clear our most productive sector is being squeezed from all angles."
"Banks cannot continue to protect their margins if it is at the expense of the productive export sector," York says.
