Bollard slashes rates and says they will stay low

Not only did Reserve Bank governor Alan Bollard slash interest rates again today, he indicated further modest cuts are likely and that rates will remain at or below current levels through to late 2010.

Thursday, April 30th 2009, 10:04AM

by Jenny Ruth

Inflation is now likely to be lower than previously expected over the medium term and weaker global growth and "an unwarranted tightening in financial conditions" justify a further big cut in interest rates, Bollard says.

He cites the rise in long-term interest rates and a stronger-than-expected New Zealand dollar in cutting his official cash rate (OCR) from 3% to 2.5%, in line with most economists' expectations, and down from 8.25% in July last year.

Today's statement is in sharp contrast to his declaration late last year that the recession was over. Bollard had previously indicated 2.5% would probably be the OCR's low.

One analyst says today's statement "twisted the knife" in indicating rates won't be rising any time soon.

The response from financial markets was swift, the currency dropping about 0.8 US cents to 56.30 cents within half an hour of Bollard's statement and the two-year swap rate dropping about 26 basis points.

The 90-day bank bill rate, from which floating rate mortgages are priced, dropped about 15 basis points to 2.88% - while traditionally banks' floating rates are about 200 basis points above the 90-day banks bills, the four major banks' floating rates are currently 350 to 360 points higher.

Nick Tuffley, chief economist at ASB Bank, says the message Bollard would like to see "shouted from the roof-tops" is short-term rates are likely to remain low for some time and people need be in no rush to take out fixed-rate mortgages.

Darren Gibbs at Deutsche Bank was the one economist arguing Bollard didn't need to cut rates today. He says yesterday's business confidence survey showing a marked improvement in sentiment proves "we are getting some traction from policy already in place."

Gibbs suggests if Bollard cuts rates further and keeps them down as long as he is now indicating, the economy is likely to rebound much faster than Bollard expects and he will have to start raising rates again much sooner and faster than he now expects.

Tags: OCR