Reserve Bank cuts to record low 3.5%; further cuts to come

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.”

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Savers are the bed rock that enables banks to lend, indeed the "banking multiplier" suggests that for every $ 100 saved the banks could lend or create credit of $ 1250. This would likely go into consumption spending. So, by reducing interest rates it does nothing to encourage saving, thus for every $ 100 not saved it means $ 1250 is unable to be lent out and spent on consumption.

So leaving aside the feeling that the irresponsible have been once again saved from their own folly at the expense of the savers, it does nothing to boost consumption spending or increase credit supply.

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Watch the other banks stall on dropping interest rates much further no matter how low the OCR goes... because the cost of inter-bank borrowing remains high... apparently.

It's like the petrol prices here going up the second oil overseas goes up by a dollar and the predictable very tardy response when it drops by a dollar... because the refining costs have gone up... *yawn*

Or Electricity bills shooting up because of the low hydro lake levels, but failing to become cheaper when the lakes fill up with water *bigger yawn*

Expect to see the Banks fudging about interbank borrowing costs etc instead of passing the rate decreases onto you the consumer. How many us need to switch to Kiwibank before the Australian-owned banking oligopoly is finally broken?

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I'm picking then Dave that you're obviously quite knowledgeable on the workings of the banking and finance industry behind the scenes. It's interesting as I have been involved for some 20+ years in banking & finance and I truely thought there was an impact on the banking sectors costs relative to the interbank and wholesale markets. Maybe I've been wrong all these years, thank you for setting me straight. I would be keen to read your report & forecast on the current econmic climate and the drivers going forward.

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Kiwibank is currently aided by the NZ Government and is not obligated to make a profit. Many NZers do not wish to give the Government any more control of them and their money. I wonder what will happen to Kiwibank when they become independent and have to start making a profit. How long they'll stay afloat then?

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KIWIBANK: never thought I would use them BUT, over the years of trying to pay off that home loan and at the same time invest in assets other than housing I have learnt a valuable lesson.

Don't pay a cent more to the banks than you have to. There is no love lost in finance, when you really need them they have you over a barrel.

It is almost certain that when my fixed rate mortgage rolls over in April I will go with the lowest 2 year rate around. That may be any one of the banks, but it is thanks to Kiwibank's policy of continually coming in under or very close to the lowest rate that we the consumer will benefit.

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Look at Kiwibank profit after removing the contract income gifted by NZ Post and applying a cost to the NZ$0.6 billion of free taxpayer money its got. NO BLOODY PROFIT JUST ANOTHER TAXPAYER BLUDGER!! No business every succeeds on lowest cost alone!!
Time for Kiwibank to front-up and pay its way to reduce costs on struggling taxpayers like me!!

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