Bollard disappoints some with 50 point OCR cut

Reserve Bank governor disappointed those hoping for a bigger interest rate cut but still cut his official cash rate (OCR) to an historic low citing the very rapidly deteriorating world economy and extreme volatility in international financial markets.

Thursday, March 12th 2009, 10:38AM

by Jenny Ruth

The OCR now stands at 3% from 3.5% previously and has been cut from 8.25% in June last year.

While most economists had expected a cut of this magnitude, some had argued the worsening global outlook justified a 100 basis point cut and the financial markets had been pricing in between 65% and 75%.

Within half an hour of the announcement, the New Zealand dollar had climbed nearly half a cent against the US dollar and wholesale interest rates between three months and two years rose about 20 basis points.

Bollard is expecting the economy to start recovering by mid-year.

"Given international developments at present, and the lags attached, that could prove optimistic," says Westpac chief economist Brendan O’Donovan who had thought a 100 point cut was justified.

Robin Clements, an economist at UBS New Zealand who had expected a 50 point cut, says the word "uncertain" appeared a lot in both the press release and the monetary policy statement.

"The degree of risk about what’s going on is still pretty high," Clements says. Nick Tuffley, chief economist at ASB Bank, another picking a 100 point cut, says Bollard seems reluctant to push the OCR down too low.

Bollard is "putting a lot of weight on the monetary and fiscal stimulus coming through the pipeline" and seems to feel he’s anticipated a lot of the bad news, Tuffley says.

The Reserve Bank is now forecasting a "super-charged" rebound in economic growth to 4.8% for the year ended March 2011, up from its previous 4.3% forecast. "You can still see a lot of downside risk coming through. I think it would be fantastic if that’s the growth we end up with but private sector consensus is for worse outcomes," Tuffley says.

Tags: OCR