ANALYSIS: Why cut rates and why now?

NBR's Rob Hosking breaks down the Reserve Bank's OCR announcement. With special audio feature.

See also: RBNZ: Wheeler cuts OCR, signals more on way

Two factors drove the Reserve Bank decision to cut interest rates today – and neither of them was the Fonterra payout forecast.

Falling inflation expectations by New Zealand firms opened the door to the possibility of a cut. The Reserve Bank did not have to worry about a return to price and wage increases of the kind it was expecting only three months ago,

And the global economic situation made such a cut necessary: while global GDP is not tanking, it is lower than anticipated at the time the Reserve Bank released its last monetary policy statement, and other central banks are now cutting interest rates drastically.

Fonterra's milk payout forecast announced this week is really only a result of that lower global outlook, particularly Chinese economic prospects.

The Reserve Bank expects to cut the official cash rate, now at 2.25%, at least one more time this year, and possibly more.

The next review is at the end of April but a further cut is more likely at the June or August review.

Tune into the special audio feature to listen to Rob Hosking discuss today’s Reserve Bank decision. 

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