OCR cut to 2.5pct, more reductions unlikely

  • 10/12/2015
Reserve Bank Governor Graeme Wheeler (Getty)
Reserve Bank Governor Graeme Wheeler (Getty)

By Ranjani Ponnuchetty

ANZ is the first bank to blink as the Reserve Bank gave homeowners an early Christmas present by reducing the Official Cash Rate (OCR) from 2.75 to 2.5 percent today.

This is the fourth interest rate cut this year and it's the lowest the OCR has ever been set since it was introduced in 1999.

It didn't take long for the first bank to make its move, with ANZ announcing cuts to floating and flexible mortgage rates – the latter to 5.85 percent, and floating rates 25 basis points to 5.74 percent.  

Governor Graeme Wheeler is putting the cut down to below average economic growth and low inflation.

"Growth in the New Zealand economy has softened over 2015, due mainly to lower terms of trade."

"Combined with the increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment," Mr Wheeler says.

Headline inflation is well below the Reserve Bank's target of one to three percent due to the previous strength of the New Zealand dollar and the 65 percent fall in world oil prices since mid-2014.

"The inflation rate is expected to move inside the target range from early 2016."

Mr Wheeler continues to raise concerns over the heated Auckland housing market, saying house price inflation in the country’s largest city remains high, posing a financial stability risk.

But he says there are some early signs the current house price inflation may be moderating.

"Residential building is accelerating, and recent tax and loan-to-value ratio measures are expected to reduce housing pressures.”

Despite the Governor painting a fairly healthy economic outlook for the coming year, he says there are a number of uncertainties and risks.

He says that continuous weak dairy prices, a prolonged El Nino drought, higher household expenditure and persistently strong net migration all put our economy in jeopardy.

The current cut means interest rates are now at post-Global Financial Crisis and post-Canterbury earthquake levels.

The Bank's main objective is to lift inflation to the middle of the target range, which they’re hoping to achieve at the current setting.

However, Mr Wheeler says the Bank will reduce rates if circumstances warrant.

Opposition parties say the cut is, for the most part, the right move and shows the Government is running out of ideas for the economy.

Green Party co-leader Metiria Turei says it'll help small and medium-sized businesses to create jobs and bring mortgage payments down.

"However, a cut to the OCR will pour fuel on the fire in the Auckland property market. But the OCR should not be the tool used to control the housing market in Auckland," she says.

Labour's finance spokesman Grant Robertson believes the cut shows the Government has no plans to grow the economy, lift incomes and lower unemployment.

"With the impending risk of drought and the potential for a collapse in the housing bubble, the risks to an already stumbling economy are high. The Government needs to bring forward infrastructure programmes and work with businesses and local communities to create decent work," he says.  

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