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Bollard delivers unprecendented rate cut

-Jenny Ruth

Thursday 23rd October 2008

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Jenny Ruth
Reserve Bank governor Alan Bollard cut interest rates by an unprecedented amount citing ongoing global financial market turmoil and a deteriorating outlook for world growth.

Bollard cut his official cash rate (OCR) from 7.5% to 6.5%, the biggest move since the central bank introduced the measure in March 1999.

The New Zealand dollar bounced sharply after the announcement but had been heavily sold down over night. It jumped from 58.5 US cents to 59.3 cents within 20 minutes of the rate cut.

Nick Tuffley, chief economist at ASB Bank, says after the Reserve Bank announced late yesterday Bollard would hold a press conference – an unusual move after an OCR review between monetary policy statements – rumours started swirling that perhaps the rate cut might be even bigger than the expected one percentage point.

Wholesale interest rate markets, which had already priced in such a cut, were little changed.

Today’s cut is "a pretty prudent decision, given that we’re vulnerable at the moment," Tuffley says.

Bollard said if inflation pressures abate as he expects, further rate cuts are likely.

"The Reserve Bank is still giving a reminder that inflation isn’t entirely absent from its thinking," Tuffley says.

Figures earlier this week showed the annual inflation rate at 5.1%, well above Bollard’s target zero to 3% range, but the current recessionary domestic environment, coupled with rapidly slowing global growth, is expected to dampen inflation.

Robin Clements, an economist at UBS New Zealand, says although keeping inflation in check is Bollard’s job, "I wouldn’t have though that was the dominant concern at the moment." While Bollard mentioned being concerned about construction costs, with housing activity at its lowest in decades, "surely construction costs are going to ease."

Clements says Bollard’s statement was more noteable for what it didn’t say, particularly in not explaining why he waited until today to cut rates rather than doing it weeks ago when Australia’s central bank cut rates.

Bollard also made no mention of how much of today’s cut would be passed through to retail borrowers, Clements says.

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