There Is No Depression in New Zealand - Reserve Bank

The Reserve Bank Governor Dr Alan Bollard chopped the official cash rate from 6.5 percent to 5 percent on Thursday, the lowest level for five years.

In perhaps the "famous last words" category, Dr Bollard pronounced that "We believe the recession has ended and we will have positive but low growth for the next four quarters."

He then jawboned trading banks to "share the pain" and pass on the interest rate cut to their household and business customers and to keep advancing loans in tight conditions.

Banks responded by passing on some of the rate cut but not the full 150 points.

Trading bank economists think the worst is not yet over and that a 100 basis points cut in the OCR is possible at the next review in late January.

The major export markets for New Zealand are now contracting at a faster rate than previously estimated and the drop off in demand is likely to make the Reserve Bank's pronouncement that there is no longer a recession in New Zealand a mockery.

Should things get worse, Dr Bollard says the Reserve Bank has "a lot of ammunition in this box" to cut interest rates.

A pity the Bank didn't look around hard enough in that box for a tool (other than ammo) to squeeze the speculative bubble out of the New Zealand housing market a couple of years back. At the time it seemed the Reserve Bank was standing around saying it's all very terrible but we can't think of anything we can do about it.

More of the same inertia was exhibited in the recent deposit insurance policy fiasco when New Zealand got backed into a scheme because Australia had announced back in mid year it was going to pass legislation instituting its own scheme.

Did no one at No. 2 The Terrace think then that New Zealand would likely have to act to stem a tide of deposits following workers across the Tasman? Or that global financial meltdown would precipitate the conditions where New Zealand would be compelled in an open economy environment to match competitively overseas deposit insurance schemes?

Ideology rather than clear thinking still seems to guide policy in Wellington. And it's not just limited to the Reserve Bank.

So with apologies to Blam Blam Blam, 80s Kiwi rock band: There Is No Depression in New Zealand, Dr Bollard...

Reserve Bank Chops OCR Interest Rate by Full 1 Percent

Comparative Central Bank Interest Rates - New Zealand, Australia, United States
Fairfax Media

Reserve Bank Governor, Alan Bollard, has chopped the Official Cash Rate by a full one percent to 6.5 percent in his October review of monetary conditions. It was the single largest cut in the rate since the OCR was introduced in 1999. The OCR is the rate at which the Reserve Bank lends to or borrows from the NZ banking system.

With the increasing impact of the global economic crisis showing up in New Zealand's domestic recession in the form of weakening export demand, the Reserve Bank's hand was forced into a large cut. Market sentiment is that a further 0.75 percent can be expected in the next few months.

Domestically, the weakening of the housing market, tightening credit, a decline in Fonterra's payout to dairy farmers next year, and increasing unemployment are combining to shift the Reserve Bank's concern to offsetting weakening demand from inflation control as price increases are moderating.

Reserve Bank of Australia Slashes Interest Rates

The Reserve Bank of Australia cut its official cash rate a full percentage point to 6.0 percent overnight in response to tightening domestic credit conditions and stock market volatility brought on by the global financial crisis. It was the RBA's largest cut since 1992 and stunned financial markets because of the abrupt U-turn in Australian monetary policy.

Reflecting tight credit conditions, Australia's major banks only passed on 80 basis points (0.8 of the 1 percent cut) to their variable home loan rates.

Australia's OCR cut comes later than the two in New Zealand in recent months, but the Australian cut will intensify pressure on the Reserve Bank of New Zealand to cut its OCR further.