By | January 29, 2009

New Zealand now has the lowest Official Cash Rate since its introduction in March 1999, as Reserve Bank Governor Alan Bollard announced a 150 basis point cut.

This cut takes the OCR down to 3.5 per cent, a full percentage point lower than the previous bottom of 4.5 per cent when the rate was first introduced a decade ago.

Alan Bollard has again called on banks and financial institutions to pass on the reductions to their customers.

The money markets have been regarding a cut from 5 to 4 per cent as a near certainty and saw about a 50:50 chance that governor Alan Bollard would drop the rate to 3.5 per cent.

Since last July the Reserve Bank has lowered the OCR by a cumulative 475 basis points, dispensing ever-larger cuts as the flow of economic data, foreign and domestic, has worsened markedly.

In a press statement accompanying the announcement, Bollard said: “The news coming from our trading partners is very negative. The global economy is now in recession and the outlook for international growth has been marked down considerably since our December Monetary Policy Statement.

Inflation pressures were abating, said Bollard. He said the bank had confidence that annual inflation would “be comfortably inside the target band of 1 to 3 per cent over the medium term”.

“Given this backdrop it is appropriate to take the OCR to a more stimulatory position and to deliver this reduction quickly,” he said.

“Today’s decision brings the cumulative reduction in the OCR since July 2008 to 4.75 percentage points. Lower interest rates will have a positive impact on growth, alongside a lower exchange rate and fiscal stimulus, provided firms and households do not unnecessarily contract their spending.”

Bollard again made the point that the bank expected financial institutions to 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,” said Bollard.

“Further movements in the OCR will be assessed against emerging developments in the global and domestic economies and the response to policy changes already in place. We would expect any further reductions to be smaller than those seen recently.”