RBNZ cuts OCR to record low 2.5%, low rates until late 2010

Thursday 30th April 2009

Reserve Bank of New Zealand Governor Alan Bollard cut the official cash rate 50 basis points to a record-low 2.5%, saying interest rates would stay low until late-2010 as the New Zealand economy “remains weak”.

Domestically, “business sentiment is low, investment has been curtailed and employment reduced,” Bollard said in Wellington today.

“We expect to keep the OCR at or below the current level until the latter part of 2010,” he said, with the timing and extent of a global recovery “highly uncertain”.

The central bank expects lower medium-term inflation than previously forecast due to higher long-term interest rates and a stronger-than-expected currency, and “the OCR could move modestly lower over the coming quarters,” Bollard said.

Interest rates have been slashed 5.75 percentage points since July, when Bollard bet inflation would abate as the economy headed deeper into recession.

The annual rate of inflation slowed to 3% in the first quarter, back within the central bank’s target band and the lowest since the third quarter of 2007. Inflation was 3.4% in 2008.

Bollard said the world economy “deteriorated further than expected in the first quarter of 2009,” while US gross domestic product shrank 6.3% annually, worse economists’ expectations.

Although New Zealand hadn’t experienced the “same extreme falls in economic activity as seen in a number of our trading partners,” the conditions caused by global slump were likely to “remain dominant throughout 2009,” he said.

Bollard, who last year embarked on the steepest easing since the OCR’s inception a decade ago, has “room to go further in responding to deteriorating economic conditions,” the OECD said in its country report this month.

New Zealand’s economy may contract 0.8% this year before weak growth resumes in 2010, the central bank forecast in its March monetary policy statement.Bollard will “hammer home the message to the public, and to a lesser extent, the market, that it does not expect to reverse the course of policy in the foreseeable future,” Darren Gibbs, chief economist at Deutsche Bank, said before the RBNZ statement.

The Governor jawboned the currency down at the start of the month when it pushed close to 60 US cents after the central bank forecast it to fall in the near-term, which will lift exports and reduce the current account deficit, which has blown out to 8.9% of gross domestic product.

The kiwi tumbled to 56.55 US cents from 57.31 cents immediately before the announcement, and weakened to 55.10 yen from 55.97. It slipped to 77.93 Australian cents from 78.87 cents and fell to 42.63 euro cents from 43.19 cents.

Some economists are predicting the global downturn is reaching its trough, with the US Conference Board sentiment index this week showing consumer confidence climbed by the most in four years.

In New Zealand, government figures showed exports topped $4 billion for the first time ever in a month in March, helped by rising prices for farm commodities.

Fonterra Cooperative Group, the largest exporter of dairy products in the world, this week raised its forecast payout to farmers by 10 cents to $5.20 per kilogram, still well down on the NZ$6 per kg payout predicted last November and last season’s record $7.90 payout.

The National Bank Business Outlook, a survey of 1,500 companies around the country measuring business confidence, rose to a net 15% of respondents expecting a deterioration in the year ahead, up from a net 39% in March, as the prospect of green shoots sprouting in the economy take hold.

Firms’ predictions for declining conditions in their own activity fell to 4% from 21%, the largest improvement since 1993. Meanwhile, the Federal Open Market Committee reviewed the benchmark rate in the US, and opted to hold it in a range between zero and 0.25% as government data showed first-quarter GDP shrank 6.3% annually.

The committee refrained from increasing its quantitative easing programme, in a sign the recession may have bottomed out.

Businesswire.co.nz

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