Bollard boosts confidence; floating rates slashed

By Jenny Ruth

Thursday 10th March 2011 1 Comment

Reserve Bank governor Alan Bollard delivered a large boost to confidence by aggressively slashing interest rates in reaction to the devastating Christchurch earthquake.

Bollard cut his official cash rate (OCR) from 3% to 2.5%, taking it back to the record lows which followed the global financial crisis.

Financial markets had already priced in most of the cut and short-term wholesale interest rates fell about another 10 basis points after the decision.

The New Zealand dollar fell about half a US cents initially but then recovered about half that.

Home lending banks are already cutting their floating mortgage rates, for example, ASB Bank slashing its rate from 6.2% to 5.75% and Kiwibank cutting its rate from 6.2% to 5.65%.

"Most New Zealand economists were reasonably convince they (the Reserve Bank) had to do something," says Robin Clements at UBS New Zealand who is Christchurch based.

If Bollard hadn't cut rates today, the banks which cut a number of fixed-rate mortgages since the earthquake would have been raising them again.

"Confidence had almost certainly deteriorated. You do what you can to try and buffer that impact," Clements says.

"A stronger economy outside of Christchurch is going to be important if we're to maintain any sense of recovery."

Stephen Toplis at Bank of New Zealand says in the current environment "like everyone else, we're flying completely blind."

Indicative of that, the Reserve Bank's monetary policy didn't contain the usual macro economic outlook nor a quarterly track for GDP, inflation and exchange and interest rates, Toplis says.

"That's not necessarily a criticism but it's symptomatic of how much uncertainty there is out there."

Paul Bloxham at HSBC, who had argued that rather than interest rates being cut, a better response to the Christchurch quake would have been targeted government spending, nevertheless says it was a reasonably difficult call for Bollard.

"Obviously, the Reserve Bank's judgment is that the weakened confidence and the reduction in the economy's capacity in the short run is going to be large enough" to warrant today's cut.

"Cutting interest rates when there's a great deal of construction going to be happening over the next years and when global inflation is rising is potentially a risk," Bloxham says.

It may be Bollard will have to reverse today's cut sooner than he currently envisages.

Comments from our readers

On 11 March 2011 at 9:31 am ted said:

this is about time and necessary. uk rates are still holding at 0.5% and situations do demand a need to turn away from the inflationary dragon at times. i would like to see more to come as i believe there are very few pressures - other than cost push - which is a potential issue