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 Chops OCR by 0.5 percent in 2nd Rate Cut

The Reserve Bank slashed the Official Cash Rate, its lending rate, 50 basis points - twice as much as expected by financial analysts - in its second rate cut in around six weeks. The cumulative rate reduction is now 0.75 percent. See press statement here. The September Monetary Policy Statement released at the same time may be found here.

With its primary policy responsibility as set out in the Policy Targets Agreement (PTA) as the requirement to keep inflation within the 1-3 percent range in the medium term, the Bank predicts that the "marked slowdown, led primarily by the household sector" will result in "lower inflation pressures in the medium term". An easing in world oil prices is probably likely to more than offset the depreciation of the Kiwi dollar that is taking place in recent weeks as the US dollar regains some strength.

The Reserve Bank points to tightening credit conditions within New Zealand impacting households and business as grounds for bringing forward its easing of monetary conditions. No doubt the Bank is mindful of the chronic financial stress in some parts of the financial sector (see yesterday's post) and the real estate market, and the high debt burden of the household sector that in the absence of monetary easing might precipitate an accelerated rate of foreclosures and personal bankruptcies. After years of low domestic saving rates and a consumption binge, "tomorrow" has arrived and the chips are falling where they may.

Edgy times at the Bank.

While this blog concluded back in late July that "A half-point cut, and some months ago, might have been more in order given the increasing gravity of the financial instability and weakening macroeconomic conditions", we are under no illusions that Governor Alan Bollard reads our scribblings. Still, we are pleased that through ESP or analysis moving in parallel he has reached the same conclusion albeit a bit later in the piece!