Bollard slashes interest rates

Reserve Bank governor Alan Bollard met the most extreme expectations in slashing interest rates, citing ongoing financial market turmoil and the deteriorating global economy.

Thursday, December 4th 2008, 10:38AM

by Jenny Ruth

Bollard slashed his official cash rate (OCR) from 6.5% to 5%, the biggest ever cut since the central bank introduced the measure in March 1999. The OCR is now at its lowest level since January 2004 and is down from 8.25% in July.

Given recent developments globally, "it is appropriate to deliver this reduction quickly to support the economy and keep inflation from falling below the target band," Bollard said.

The New Zealand dollar was little changed after the announcement while wholesale interest rates fell about five basis points after the announcement.

ASB’s chief economist Nick Tuffley says the magnitude of the rate cut shows Bollard wants to be very proactive in responding to global events.

"It’s a very pragmatic move. Monetary policy is the quickest way to get some stimulus back into the economy," Tuffley says. In normal circumstances, an OCR at about 6.5% would be regarded as neutral.

Tuffley says Bollard could deliver another cut of up to 100 basis points when he next reviews the OCR in late January.

"Between now and the end of January, I wouldn’t expect that we see much encouraging news on the global front. The situation’s likely to confirm their view that there’s a lot of downside risk to their forecasts."

Brendan O’Donovan, chief economist at Westpac says Bollard could have justified a cut anywhere between 75 and 200 basis points and by cutting so much is indicating a very proactive stance towards the current crisis.

O’Donovan says the bank is also responding to credit availability as well as the poor global outlook.

Bollard explicitly targeted banks: "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."

ASB Bank moved quickly in cutting its variable mortgage rate to 7.95% from 8.7% within 15 minutes of the announcement – it had already cut the rate in November from 9.45% in anticipation of the OCR falling.

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