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Rate cut may spur savings, lower returns

By Paul McBeth

Thursday 4th December 2008

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The Reserve Bank of New Zealand's record cut in interest rates may encourage more home owners to join KiwiSaver though existing members may find their returns are lower, says business commentator Mary Holm.

Banks including Westpac, ASB and Kiwibank cut mortgage rates in response to Governor Alan Bollard's 1.5 percentage point cut to the OCR today. Lower mortgage payments may free up cash to invest in the pension fund, Holm said.

"Most people have at least some money in interest bearing accounts," she said in a report.

The OCR was cut to a five-year low of 5% as the Reserve Bank continued its sharpest series of rate cuts since the implementation of the OCR in 1999. Since July, rates have been cut 3.25 percentage points.

Reserve Bank Governor Alan Bollard expects his rate cut to compliment the falling value of the New Zealand dollar and encourage a rebound in economic growth.

At a press conference after the announcement, he said the recession was shallower than expected, and that he thinks it is technically over.

New Zealand's economy fell into recession in the first half of the year. With costs of borrowing on the decline, business profits should rise, and Holm said there is a good case for Kiwisaver investors to move their funds into riskier portfolios to take advantage of the likely improvement on the stock markets.

Rising share prices could give the impetus for those with more than ten years left in their funds to move into slightly riskier assets.

"Some people are in too conservative a fund," she says, "(but they) should not invest on the whim of the market."

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