Reserve Bank cuts OCR to 4.75%

As expected, Reserve Bank governor Don Brash cut his official cash rate (OCR) half a percentage point, saying slowing global growth is already affecting the New Zealand economy and will continue to do so.

Wednesday, November 14th 2001, 10:19AM

by Jenny Ruth

Brash also highlighted the " very considerable" degree of uncertainty and promised to either cut rates further or to put rates up swiftly if circumstances warrant.

"We will be monitoring all of the information as it becomes available, and will be constantly vigilant as to the outlook for inflation," Brash says.

He cut the OCR from 5.25% to 4.75%, having cut it from 6.5% since the beginning of this year.

Although the move was well anticipated with 11 out of 13 economists forecasting it, the market still managed a rally with the 90-day bank bills, from which variable mortgages are priced, slumping from 4.88% late yesterday to 4.80% this morning.

"There was some residual doubt that Don Brash might have only gone 25 points. Earlier in the year, he had been quite cautious," says John McDermott, chief economist at National Bank.

The banks also lost little time in cutting their mortgage rates. WestpacTrust, for example, cut its variable rate from 7.2% to 6.7%. As well, its one-year fixed rate of 5.95% is its lowest in 20 years and its five-year fixed rate of 6.99% is the lowest ever offered by a major New Zealand bank.

Much had changed since the last monetary policy review in August, Brash acknowledged. Back then, the OCR stood at 5.75% and Brash was warning inflation could become a problem.

"Even before the tragic events of 11 September, the world economy was slowing quite rapidly. The events of 11 September exacerbated that slowdown by dealing a blow to business and consumer confidence around the world," he says.

He noted export prices are falling "across a wide front," and nervousness about air travel is hurting tourism. As well business confidence has declined markedly and the central bank expects investment spending will slow.

"The economy has already slowed quite sharply and is likely to continue growing rather slowly in the immediate future. This will exert downwards pressure on inflation," Brash says.

New Zealand is in a relatively strong position with demand pressures still evident in some areas, but the expected slowdown over the coming year should see those pressures abate and inflation fall to the middle of the central bank’s zero to 3% target, he says.

Inflation in the year ended September fell to 2.4% from 3.2% in the year ended June.

"Monetary policy is now set to accommodate quite a bit of additional weakening in the global environment. That reflects our judgement about the risks that lie ahead. But the uncertainty in the present situation is very considerable, and it is not inconceivable that the current slowdown will prove to be short-lived," Brash says.

"We will be monitoring all of the information as it becomes available, and will be constantly vigilant as to the outlook for inflation," he warned.

National Bank is forecasting the international scene will be bad enough to warrant a further 25 basis point cut in the OCR at the Reserve Bank’s next OCR review on 23 January and that will be the trough in rates. It expects the OCR will remain unchanged through to about August but that it will have risen back to 5.75% by the end of 2002.

« OCR cut to 4.75 per cent

House prices bounce »

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