Bollard slashes rates citing global recession

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Reserve Bank governor Alan Bollard slashed interest rates by more than most had expected but few were surprise at the magnitude of the cut, given the deteriorating global outlook.

Thursday, January 29th 2009, 9:58AM

by Jenny Ruth

Bollard cut his official cash rate (OCR) from 5% to 3.5%, saying the global economy is now in recession. He has progressively cut the OCR from 8.25% since July last year.

"I wouldn’t have been gob-smacked if he had moved 200 (basis points)," says Brendan O’Donovan, chief economist at Westpac, who was one of the few predicting a 150 point cut.

"With the severity of the situation New Zealand’s facing, it would’ve made no sense not to front up. He’s fully justified in going 150 and there was even a case for something larger," he says.

O’Donovan says he’s still picking the OCR will trough at 2.5% "but let’s just wait and see where the data runs."

The wholesale interest rates market had been taking a two-way bet by pricing in a 125 basis point cut and the two-year swap rate dropped about 20 points after the announcement. The New Zealand dollar fell about half a US cent.

Nick Tuffley, chief economist at ASB Bank, says Bollard is "really taking on board just how much the global environment has changed dramatically since December. There’s a strong hint (the central bank) will definitely cut the OCR further."

The big debate currently is how low the OCR will go and how quickly it will take to get there – current indications are somewhere between 2% and 2.5%, Tuffley says.

Bollard did say he expects further OCR cuts will be smaller than the recent cuts – he cut 100 basis points in October and 150 in December. O’Donovan says that’s the third time in a row Bollard has made this statement.

Darren Gibbs at Deutsche Bank says "it was definitely the right policy move" and is currently picking a further 50 basis point cut the next time Bollard reviews the OCR in March.

"I think the Reserve Bank will continue to be surprised at how bad things are," Gibbs says.

As has become the norm lately, Bollard stressed banks need to pass on lower wholesale interest rates to their customers.

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