Thursday, January 29, 2009

OCR - record low

How low would he go? That was the question being asked of Dr Alan Bollard before the latest OCR review today. And Dr Bollard has indeed gone low - cutting the OCR by 1.5 percentage points to a new low of 3.5%. The Herald reports:

In a press statement accompanying the announcement, Bollard said: "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 were abating, said Bollard. He said the bank had confidence that annual inflation would "be comfortably inside the target band of 1 to 3 per cent 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," he said.

"Today's decision brings the cumulative reduction in the OCR since July 2008 to 4.75 percentage points. Lower interest rates will have a ositive impact on growth, alongside a lower exchange rate and fiscal stimulus, provided firms and households do not unnecessarily contract their spending."

Bollard again made the point that the bank expected financial institutions to play their part in the "economic adjustment process" by passing on lower wholesale interest rates to their customers.

Let's all hope that the banks heed Dr Bollard's advice, and that they do indeed pass on these cuts to their customers. Businesses especially will be looking for a positive response from their banks, as the gloomy economic predictions start to erode business confidence.


showmethetaxcut said...

In spite of what happened today (Westpac and Kiwibank dropping rates), the banks will not heed the message and he will be forced to go to 2.5% to try and get the point across.

Listen to Cameron Bagrey of ANZ. The banks have got this "but a large part of our funding is sourced offshore" argument for why responses to OCR drop cannot result in 100% passing on of the benefits of rate reductions.

heisenbug said...

It's pointless - as we've already seen in the States and Japan, interest rates can go as low as you like and still the economy tanks. Welcome to the brick wall at the end of the Keynesian road, people. Time for another paradigm, and time to get Government tax-and-spend stupidity under control. Spending is not going to get us out of this, it's time to start saving (either by actual saving, or by paying off debt ASAP).