Initial reaction - as expected. Our dollar has tanked with the news that the Reserve Bank has slashed 1.5% points off the OCR - now at 3.5%.
Reserve Bank Governor Alan Bollard commented that “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 to 3 percent 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.
The banks failed to pass on the RBNZ's cuts last time. Gareth Morgan on RNZ predicted 4% mortgage rates by the end of the interest rate cutting round - sometime this year. I posted previously on how our Aussie-owned cartel of retail banks have not passed on the cuts and instead used the opportunity to increase their gross margins. Take Kiwibank - the best - 6.49% on 1yr fixed mortgage, before the last cut in early December, now 5.99% on their site. ASB 6.45%. They play this game whereby they cut a tiny bit in advance of an OCR announcement and pretend that they are ahead of what is going on rather than a laggard.