RBNZ cuts interest rate and inflation "will peak around 5%"

The Reserve Bank has just lowered its key interest rate. I am surprised Bollard has acted this early - like most people I picked September. The commentators I've just listened to on National Radio don't think that mortgage interest rates will move much. Inflation running away is the main concern which led me to believe waiting would be in order. Bollard however seems to think we are close enough to turn the corner:

"Recent oil and food price increases mean that annual CPI inflation should peak around 5 per cent in the September quarter of this year. However, we expect that inflation will return inside the target band in the medium term. The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed."

In other words: the world-wide surge in inflation caused by commodity and energy price increases will magically disappear and the 1-3% target that Bollard has blown out for years will also magically be met because the economy is in recession.

"Economic activity is likely to remain weak over the remainder of 2008. The ongoing correction in the housing market, together with the very high oil prices, will limit household spending and constrain the extent of recovery. However, high export prices and an expansionary fiscal policy are expected to contribute to a gradual pickup in activity through 2009."

In other words: the recession will end soon as farmers' incomes increase and big government spending will stimulate the economy... next year. Well I hope so.

This is good news for the Labour government - it's a tangible sign that the mortgage belt is about to get some long awaited relief.

We've already dropped a cent against the US dollar this morning.