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Alan Bollard - Source: ONE News -
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The Reserve Bank has cut the official cash rate by 50 basis points and has signalled that it will likely remain at 2.5% - or even go lower - well into next year.
Economists had widely predicted the 50 basis point cut, following a 25 basis point cut in March from 3.25% to 3%.
At that time Bollard signalled more cuts were possible if economic conditions continued to worsen, although the OCR was unlikely to go below 2%.
Bollard on Thursday said that since March, medium-term term inflation had been lower than expected. This was due to weaker global growth and tighter financial conditions via higher longer term interest rates and a stronger than expected Kiwi dollar.
He said while there have been signs of stabilisation overseas, sentiment was still "fragile" and the duration and extent of a global recovery remained uncertain.
"While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced," Bollard said.
Bollard fired a warning to lenders, making it clear that he expected the decline in the OCR to be passed on to borrowers as existing fixed rate mortgages come due for repricing.
"This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter," he said.
Bollard said it would be some time before economic activity returns to healthy levels and the Reserve Bank will likely keep the interest rate around 2.5% over the next 18 months.
"We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters."
A hefty cut for maximum effect
Bollard took the unusual step earlier this month of making an announcement between monetary policy statements. This was to assure the market that interest rates would remain low for some time in an effort to stem a rise in long-term interest rates.
March's 25 basis point cut was largely ineffectual on lending rates with banks saying they were faced increased costs to meet a higher demand for mortgage lending.
ASB chief economist Nick Tuffley said a 50 basis point cut would be the most effective way of moving wholesale and retail interest rates. He welcomed strong talk from Bollard saying it would help keep the market clear on the Reserve Bank's intentions.
"In explicitly promising to hold the OCR at or below current levels until the second half of 2010, the RBNZ will contain longer-term interest rate expectations and prevent an unnecessary tightening in monetary conditions before the economic recovery has found its feet.
"In addition, signalling that further rate cuts are possible will mitigate the rush of borrowers looking to fix rates, and prevent a repeat of late March/ Early April," he said.
Immediately following the announcement the Kiwi dollar fell almost one cent against the Greenback, from 57.3 US cents to 56.5 cents.
It also fell one cent against the Australian dollar from 79 Australian cents to 78.
Murky outlook
While Bollard has indicated that the OCR will remain low until late next year, beyond that, the outlook is less clear.
"This is a really uncertain environment. The usual rules on how quickly the economy might bounce out of this, how quickly the Reserve Bank might need to take rates back are very, very murky," Tuffley said.
The challenge for those will loans will be choosing between the
security of longer-term loans, which may not go lower, and taking
advantage of currently low but uncertain short term rates.
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Post new commentwoggle said on 2009-04-30 @ 15:47 NZDT: Report abusive post
question for those renting what does this mean should we be challenging our landlords as rent prices seem to continuously increase? if mortgage interest rates have come down dramatically it seems why are those in a situation where it has become more difficult to afford our own homes constantly being penalised?