Reserve Bank governor Alan Bollard this morning cut the official cash rate from 5% to 3.5% in the latest in a series of large interest rate cuts.
The central bank has cut the OCR a total of 4.75% from 8.25% since July – the largest series of rate cuts in its history.
Global growth downgrades and widespread international uncertainty are the main reasons for the cut, Bollard says.
“The news coming from our trading partners is very negative….The extent of the decline in global growth prospects and the ongoing uncertainty has played a large part in today’s decision. We now expect the impact on New Zealand of these developments to be greater than we did in December.“
And there is “huge uncertainty” about the timing and strength of any economic recovery, he says.
Bollard says inflation is abating and he is confident it will be “comfortably” within the target band of 1-3% soon.
He signalled further rate cuts but says they will be smaller recent reductions.
“We would expect any further reduction to be smaller than those seen recently.”
Lower interest rates, along with a looser fiscal policy from the New Zealand government and a lower exchange rate should produce “a positive impact on growth…provided firms and households do not unnecessarily contract their spending,” says Bollard.
Banks and other financial institutions should “play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers.
“This will help New Zealand respond flexibly.”