Cash rate dropped to 8pc
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The Reserve Bank has lowered New Zealand's official interest rates to 8 per cent from 8.25 per cent.
The reduction, the first drop in official rates in exactly five years, will provide some cheer for households being hurt by high mortgage rates, and soaring fuel and food bills.
The just-announced decision will, however, come as a mild surprise to some economists, who might have felt that Reserve Bank Governor Alan Bollard would have been put off a reduction by the latest inflation figures released last week.
These showed that annual inflation had climbed to 4 per cent and economists now believe it is likely to hit 5.5 per cent later this year. This is well outside Bollard's 1 per cent to 3 per cent target.
In talking about the decision for the change Bollard said that "more unpleasant international news has emerged since the June Monetary Policy Statement, and there is a risk that the domestic economy will slow further".
As well, the cost of funds raised abroad by banks had been rising in recent months as the international financial situation has deteriorated. Today's cut would help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households.
"Recent oil and food price increases mean that annual CPI inflation should peak around 5 percent in the September quarter of this year. However, we expect that inflation will return inside the target band in the medium term," Bollard said.
"Economic activity is likely to remain weak over the remainder of 2008. The ongoing correction in the housing market, together with the very high oil prices, will limit household spending and constrain the extent of recovery. However, high export prices and an expansionary fiscal policy are expected to contribute to a gradual pickup in activity through 2009," Bollard said.
"...Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the OCR further."
Official interest rate relief is increasingly being seen as necessary, however, as the New Zealand economy plunges into recession. The economy shrank by 0.3 per cent in the March quarter and is expected to keep contracting through to and including the September quarter.
But even though today's reduction now points the way to further drops by the RBNZ, economists are warning that the lending rates charged by banks might not immediately fall - at least by as much as signalled by the RBNZ.
This is because the banks are having to pay very high rates of interest offshore, where they source about 25 per cent of their funds, due to the global credit crisis.
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This is a welcome move compared to the "head in the sand" policies that NZ adopted, courtesy of Winston Peters, following the Asian meltdown in 1997/98. The global downturn and credit crunch will ensure that there is limited risk of inflation. This is a good signal to NZ's productive sectors.
Its all a foreign language to the layman, the same with most political statements.
And "toldyouso" - you have an opinion. Yes it is partly valid but where does your animosity come from?? do you have a mortgage? do you have kids?
Costs have sky rocketed in the last two years, do you really think I have a home and a mortgage and a few luxuries because I am greedy? Finance companies send you pre-approved loan documents by mail all the time and when you need a bit of extra money because the car just crapped out, or you got a big dentist bill, or your kid needs some expensive medicine or glasses or whatever...it is really tempting to get credit, then you board that runaway train and before you know it you are borrowing from someone else to consolidate your debt.
Then you get judged with sweeping statements like yours.
The average kiwi doesn't really understand how finance works, doesn't really understand how interest rates affect them, how the political and economic environment works or can even consider predicting events, or making well informed decisions when all they really can see is easy money to pay for a necessity.
But good for you, you obviously have it sussed eh...
Not a wise decision right now as inflation is too high.
As dropping interest rates will further boost the inflation and drop the exchage rate and further on things will get more expensive.
It is not a wise decision made by RBNZ because inflation is still too high.............It is just a politically motivated decision(because election is due in near term)
Should have waited till Sept. Not a good move in my opinion.
and why shoudl it help you? the idea is to get the conditions right so that people can help themslelves.
Lowering interest rates now helps only those that have much, too much, wealth already, and harms everyone else. But, admittedly, people with low IQ will take longer to understand that. Until then, may poor kiwi survive.
Finance moves so fast these days, we see saw from one drama to the next. The whole time the underground economy flourishes. The economy is what it is and will act the way it wants. fiddling with it just makes things worse and the middle class just get to pay ...again
Sure interest rate has dropped at last, but the NZ dollars instant and continued devaluation will sure help push up imports that we all want/need - fuel, appliances, etc etc.
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Nowhere else in the world is a reserve bank's interest rate as high as NZ's. There is no justification for it. NZ's economy is contracting. It is not growing at 8% which is at least necessary to pay back the thousands of greedy fools investing their hard earned dosh in NZ, apparently Japanese housewives and Chinese. Nothing is new under the sun. In the 70s, JBL went bust advertising interest rates in Time magazine of 11 to 13% with no hope of ever repaying any investment. JBL simply wasn't growing at that rate. The fools Bollard and Cullen are doing exactly the same but with NZ Inc. Spend up. The 2008 NZ DEPRESSION is now unavoidable because of the two "Doctors".