29 Jan 2009

Reserve Bank cuts OCR to 3.5%

1:39 pm on 29 January 2009

The Reserve Bank of New Zealand has cut the Official Cash Rate to 3.5%.

It was previously 5%.

This is the lowest since the Official Cash Rate was introduced in 1999 at 4.5%.

Economists had expected another substantial cut as the global economy continues to worsen and access to credit remains tight.

The cuts began on 24 July when the bank lowered the rate from 8.25% to 8%.

Reserve Bank Governor Alan Bollard said any further reductions are expected to be smaller than those seen recently.

The rate compares with official rates of 4.25% in Australia, 0.1% in Japan, 1.5% in Britain, 2% in the eurozone and 0% - 0.25% in the United States.

New Zealand is now in recession, which began nine months ago. Inflation is 3.4%.

On Wednesday, Fonterra cut its payout forecast to dairy farmers by 15% to $5.10 per kg of milk solids, at an expected cost to the economy of $1 billion in lost income.

The International Monetary Fund has added to the gloom, predicting world growth of 0.5% this year. That's the lowest level of growth since World War II.

Bank statement

In a statement issued on Thursday, Reserve Bank Governor Alan Bollard commented:

"The news coming from our trading partners is very negative. The global economy is now in recession and the outlook for international growth has been marked down considerably since our December Monetary Policy Statement.

"Globally, there has been considerable policy stimulus put in place and we expect this to help bring about a recovery in growth over time. However, there remains huge uncertainty about the timing and strength of a recovery.

"The extent of the decline in global growth prospects and the ongoing uncertainty has played a large part in today's decision.

"We now expect the impact on New Zealand of these developments to be greater than we did in December, as a result of a more negative outlook for the terms of trade and exports, and tighter credit conditions.

"Inflation pressures are abating. We have confidence that annual inflation will be comfortably inside the target band of 1% - 3% over the medium term.

"Given this backdrop it is appropriate to take the OCR to a more stimulatory position and to deliver this reduction quickly.

"Today's decision brings the cumulative reduction in the OCR since July 2008 to 4.75 percentage points.

Lower interest rates will have a positive impact on growth, alongside a lower exchange rate and fiscal stimulus, provided firms and households do not unnecessarily contract their spending.

"To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers. This will help New Zealand respond flexibly.

"Further movements in the OCR will be assessed against emerging developments in the global and domestic economies and the response to policy changes already in place. We would expect any further reductions to be smaller than those seen recently."