Interest Rates

Great to see the banks have been so quick to pass on the benefits of the drop in the OCR.

OCR: Down to 6.5%

The Reserve Bank has, as expected announced a cut of 100 points.

Here is the statement


NEWS RELEASE
Date 23 October 2008
Time Embargoed until: 9:00am

OCR reduced to 6.5 percent

The Reserve Bank today reduced the Official Cash Rate (OCR) from 7.5 percent to 6.5 percent.

Reserve Bank Governor Alan Bollard commented that "ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today's decision.

"Economic activity in New Zealand will be further constrained, relative to the outlook presented in our September Monetary Policy Statement, by these international developments. New Zealand can expect to face lower demand for exports and credit is likely to be less readily available. In this environment consumers and businesses are likely to be more cautious and curtail spending.

"The reduction in domestic spending will be partly offset by the depreciation of the New Zealand dollar over the past few months, falling oil prices and the recent loosening of fiscal policy.

"With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to
3 percent around the middle of 2009. However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high.

"Consistent with the Policy Targets Agreement, the Bank's focus will remain on medium-term inflation. Should the outlook for inflation evolve as projected we would expect to lower the OCR further. However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out."

Will An OCR Cut Stop The NZ Market From Falling?

It is going to be interesting to watch, but as most seem to have factored an 100 point cut into calculations we don't think it will be enough to override concern at what has just happened in the US and Europe overnight.

We Think There Will Be An 100 Point Cut In The OCR

We don't think that Bollard will go beyond 100 as he will want to see how the market reacts to 100. He will be particularly interested to see what the banks pass on to borrowers. Less than 100 will surprise people and we don't want surprises, particularly when international markets have just dropped 4% overnight.

Sunday Question

What is more responsible:

• to downplay the seriousness of the economic situation so that international investors are not spooked by what is really going on in New Zealand? Or

• be upfront on the problem, give domestic and international investors an honest appraisal of the extent of the problem, and introduce policies that address the problems - such as an immediate cut in the OCR?

Why Are We Uncoordinated?

We were just listening to the head of the IMF on the radio. He made it clear that the only way we are going to get out of the current financial mess if if we act in concert. Yet New Zealand seems to be an outlier. Why is this? And why, if everyone is expecting a big rate cut in two weeks, doesn't the RBNZ act immediately? Why wait two weeks to ease pressure on business? Why keep our currency higher against the Australian dollar (our biggest export market) than it would otherwise be if we had an 100 point cut?

Key Calls For Rate Cut Now

We have to say we tend to agree with John Key on this. We had expected Allan Bollard to act more decisively today. But we do respect the fact that he is independent and that it is his call. Good on John Key for showing leadership by making this call

This from Stuff

National Party leader John Key today gave Reserve Bank governor Alan Bollard the message that New Zealand interest rates need to come down, and the sooner the better.
"Overnight we saw five or six central banks getting together and cutting interest rates and the Australians cut interest rates two days ago," he told reporters on the campaign trail today.
"While the Reserve Bank governor is independent, my view is that interest rates do need to come down in New Zealand.
"We would be eager for him to be addressing that issue and whether he addresses it on October 23 or earlier is ultimately his call."
Dr Bollard said today the bank was monitoring international developments very closely and he thought measures it had already taken were sufficient at this stage.

He Did Act

But not in the way we expected. Does anyone else think it funny that while the rest of the world can pretty much act in concert on this crisis, Australia and New Zealand don't coordinate responses?

The Hive should state a position here - we have for the last 10 years or so been advocating the creation of an Australia-New Zealand currency or an Australia/New Zealand/Singapore currency or something more viable than the New Zealand dollar. We were very pleased the other day to hear John Allen, CEO of NZ Post and owner of Kiwibank state that the days of the New Zealand dollar are numbered. Now there are two of us....

Bollard's statement follows:

Reserve Bank Governor Alan Bollard said today that the Bank is monitoring international developments very closely.
"At the moment the New Zealand financial system is working satisfactorily. It has held up relatively well in the face of the volatility and disruptions that we are seeing internationally," he said.
"New Zealand banks have high-quality assets. Fortunately they do not have the poor quality assets that have proved so damaging overseas."
Dr Bollard said that over the past year the Bank has announced a number of measures that will make it easier for financial market participants to maintain liquidity during a period of financial market disruption.
"To further improve liquidity prospects for the banking system, we are announcing that the Reserve Bank will temporarily broaden its security programme. We will, if required, be prepared to lend on the basis of fully-secured Residential Mortgage-Backed Securities (RMBSs), prior to those securities achieving formal ratings."
He said there has been good progress by institutions in developing RMBSs should they be needed.
"While we believe these measures are sufficient at this stage, the Bank retains a number of other regulatory powers. We are committed to ensuring the ongoing health of the financial system and remain ready to respond as appropriate.
"The centre of the financial crisis is in the United States and Europe and, while there will be ramifications for our economy, the next review of monetary policy is scheduled on 23 October.
"In the meantime we are staying in very close touch with the banks, and also with the Government."

Is Bollard Going To Act?

Compared to yesterday the exchange rate is a bit more stable.

But what about the NZX? It is pretty stable today also. Down just 0.13% today.

Is this an indication that things have bottomed or are people waiting for a signal?

When Will Bollard Act?

The pressure on the Reserve Bank must be mounting. First Australia cuts by 100 and overnight we have seen coordinated action by several other central banks.

The U.S. Federal Reserve cut its main rate by a half percentage point, with the central banks of China, Britain, Sweden, Switzerland and the European Central Bank all following suit with their own cuts.

Aside from this external pressure there are growing signs that inflationary pressures in the domestic economy are easing. Unemployment, in particular, is moving upwards.

Will Bollard Match The Aussies

There is much speculation in print and on radio that the Reserve Bank will have to match Australia's move in dropping the cash rate by 100 points. Here is the Dominion Post's coverage

ANZ bank chief economist Cameron Bagrie said the Reserve Bank could cut its official cash rate by the same amount as Australia, from the current 7.5 per cent, in coming days.
"It's going to be a case of riding in Kanga's pouch. I think we're going to see 100 basis points by the end of the month here as well in New Zealand," Mr Bagrie said.
"The story here is the environment has changed so much that [the feeling is] don't dilly-dally around ... I wouldn't rule out a move in the next 48 hours."
New Zealand's currency tumbled earlier yesterday as panic gripped markets. Stocks plunged as investors retreated to safe-haven assets, including the US dollar.

If Bollard wanted to be really bold he would go to 600.

Australia Cuts 100 Points

this was a bit of a shock. But if you want to drive interest rates down then this it the way to do it. Well done RBA for being bold. This, of course, puts more heat on Bollard. Everyone seems to be factoring in another 50 points, but can Bollard now afford to keep our rates above Australia's 6%? ASB is talking about reduced inflationary pressures, so maybe Bollard could be equally bold.

Expect Further Big Cut In The OCR

Well done Alan Bollard in making your bigger than expected cut last week. You might have to make another next time around if interest rates are going to continue to fall. Developments overnight must impact here and will slow the fall that was expected following last week's announcement.

Attempts to connect John Key in some way with recent actions of a bank he has not worked for in 8 years are pathetic.

OCR Down 0.5 to 7.5%

Great news for borrowers as this will have near immediate impact.

Great news for exporters as the dollar will tank.

Great news for Labour.

Bad news for importers and inflation.

Bollard is clearly more worried about the economy and global situation than many.

Further Interest Rate Cut Likely on Thursday

We hope James Weir in correct

The Reserve Bank is expected to cut interest rates to 7.75 percent on Thursday, heading for about 7 percent early next year and close to 6 percent late next year, to help boost a sliding economy.
The economy is in recession, with nine months of slowdown expected, according to some economists. A weak and slow recovery is expected later this year.

Interest rates lower

The RB has dropped the rate to 8%. This will be a surprise. Expect the dollar to fall sharply. They will be celebrating on the 9th floor!

Unfortunately this means that the RB thinks that things are really bad with the domestic economy.

Interest Rates Cuts This Year

Very interesting decision by Bollard. Lets hope the dollar starts falling......


OCR unchanged at 8.25 percent


The Official Cash Rate (OCR) remains unchanged at 8.25 percent.

Reserve Bank Governor Alan Bollard said: "The global economy is currently experiencing significant increases in oil and food prices.
These price increases are occurring at the same time as activity is weakening in many economies in response to the global credit crisis and slowing housing markets. In New Zealand, this confluence of factors is producing a challenging environment of weak activity and high inflation.

"We project annual CPI inflation to peak at 4.7 percent in the September quarter of this year. Although much of this reflects higher food and energy prices, underlying inflation pressure also remains persistent.
Nevertheless, we do still expect inflation to return comfortably inside the target band over the medium term. This is based on the expectation that commodity prices stop rising, inflation expectations remain anchored, and weakening economic activity contributes to an easing in non-tradable inflation.

"The outlook for economic activity is now weaker than in our previous Statement. We project little GDP growth over 2008, and only a modest recovery thereafter, largely reflecting a weaker household sector.
Government spending and personal tax cuts will provide some offset to this lower growth but will also add to medium-term inflation pressure.

Consistent with the Policy Targets Agreement, the Bank's focus will remain on medium-term inflation. Provided the economy evolves in line with our projection, we are now likely to be in a position to lower the OCR later this year, which is sooner than previously envisaged."

Fallow On Commodity Prices And Inflation

Brian Fallow has another thoughful piece in today's Herald. He looks at whether the current rise in food and oil prices is a short term issue or an early sign in a structural shift? If it is, what will this mean for New Zealand, and what will it mean for monetary policy? He reminds us that defeating inflation is not within the gift of the Reserve Bank alone. The fight against inflation requires many participants.

The OCR

This article from the Dominion Post's Nick Churchouse has it about right. There is still some uncertainty over when Bollard will cut. No one is expecting change this week so we will be studying what Bollard says very carefully, looking for clues.

To Cut Or Not To Cut?

Brian Fallow asks the question.

Alan Bollard faces a double dilemma.
The first arises from the fact that the economy is in the worst-of-both-worlds phase of the cycle, with growth feeble but inflation running strong. One says cut rates, the other says wait. But on top of that is a deeper issue raised by Bernie Fraser. That's Bernie Fraser the former Reserve Bank of Australia Governor, not the ex-All Black.
What if these relentless rises in oil and food prices are structural and mark an extended period of transition from an era of cheap oil and cheap food to the opposite. If they are, Fraser says it would be wrong for the central bank to respond by pushing up interest rates - a mistake he compares to pre-Keynesian orthodoxy that Governments should respond to recessions by tightening their belts, which only made things worse. Fraser is reminding us that there is an important distinction between the kind of inflation which arises when demand in an economy outstrips its ability to supply, and the kind which arises from external price shocks such as we have seen in oil and food lately.

And

If what is under way is a structural worldwide shift to higher fuel and food prices it would be futile to try to counter it through tighter monetary policy. But there is a catch. The caveat is that the central bank cannot ignore the effect on inflation expectations and therefore on price- and wage-setting behaviour. Remember the debilitating wage-price spiral of the 1970s?

Our view is that Bollard will not cut Thursday but will be signalling that a cut this year is on the cards. This should have some impact on forward rates and the dollar. Bollard will be watching this effect very closely. He will also be watching the levels of wage settlements and whether firms are tightening their belts in the same way that consumers obviously are. And therein lies another dilemma, one not covered by Fallow - how is Government reacting? Is Government tightening its belt? What will wage settlements in that sector be like this year? Is the 2% salary increase just awarded to all those who have worked 5 years (in the form of an extra week of leave) be a sign of things to come? In Wellington anyway, it is Government that is setting wage trends not the private sector.