Official cash rate cut to record low

  • 10/03/2016
Reserve Bank Governor Graeme Wheeler (Getty/file)
Reserve Bank Governor Graeme Wheeler (Getty/file)

The Reserve Bank has cut the official cash rate (OCR) by 25 basis points. It's now at 2.25 percent, the lowest it's ever been.

Governor Graeme Wheeler had indicated there could be cuts this year, but most economists didn't predict it would come so soon.

A year ago the OCR was at 3.5 percent, but due to inflation being persistently low the bank started lowering rates to stimulate growth. Despite the reductions, headline inflation is still dancing around the 0.1 percent mark, well below the bank's target of between 1 and 3 percent.

Official cash rate cut to record low

Mr Wheeler is justifying the cut because the outlook for global growth has deteriorated since December's monetary policy statement. He says there's weaker growth in China and other emerging markets, and slower growth in Europe.

He says the weak growth is despite extraordinary monetary accommodation and further declines in interest rates in several countries. Mr Wheeler also points to volatility in the financial markets increasing and low commodity prices.

Domestically, the bank says the dairy sector faces difficult challenges. The rate cut comes just days after Fonterra announced its forecast milk payout would be its lowest in 13 years.

House price inflation in Auckland has moderated in recent months, however Mr Wheeler says house prices remain at high levels and additional housing supply is needed. He says housing market pressures have now been building in some other regions.

But there is good news: Mr Wheeler expects domestic growth to be supported by strong inward migration, tourism, a pipeline of construction activity and further rate cuts. But there are risks to expected growth relating to the slowdown in the Chinese economy and the weakness is the dairy sector.

But the Governor is remaining optimistic about headline inflation, saying he expects it to move higher this year. Mr Wheeler isn't ruling out further rate cuts this year to help lift inflation.

The big banks weren't quick to move directly following the cut, with just one having cut its floating mortgage rate so far.

The Co-operative Bank's new rate is 5.45 percent, down from 5.70 percent.

The New Zealand dollar has fallen one cent to 66.47 US cents since the announcement. 

It's come as a blessing for the rural sector, with Federated Farmers urging banks to pass the cut on to mortgage holders.

"Farmers' cash flow is tight at the moment, particularly in the dairy sector, and anything that can ease the pressure on their bottom line will help get as many dairy farmers as possible through the current season," Dr William Rolleston says.

"This cut in the official cash rate should also take pressure off the dollar, which is vital for our farming sector.  We are also pleased to see that the Reserve Bank has signalled a further cut."

The Green Party's finance spokesperson Julie Anne Genter says while the decision takes the pressure off farmers and households, it was well overdue.

"For months the Governor has had to keep the official cash rate higher than needed due to the National Government's ongoing failure to address the housing crisis in Auckland.

"National needs to be working in tandem with the Reserve Bank by introducing complementary measures that will contain house price inflation instead of leaving it all up to the Reserve Bank to manage," she says.

Labour's finance spokesman Grant Robertson says the cut came as a surprise and shows the economy is in need of stimulus.

"Graeme Wheeler identified just four areas driving the economy: inward migration, tourism, a pipeline of construction activity and now accommodative monetary policy. These are short-term and out of the Government's control.

"There isn't the kind of sustainable growth in high-value industries that will boost growth and create jobs here in New Zealand. It's driven by temporary factors such as construction in Christchurch and people landing at airports for the long or short-term."