Official Cash Rate Cut

October 23, 2008 New Zealand Finance  No comments

The Reserve Bank has cut the Official Cash Rate (OCR) to 6.5%.

On Thursday 23rd of October, the Reserve Bank Governor, Alan Bollard, stated that the OCR is cut by 100 basis points, or 1 %, bringing the rate to 6.5%. While this move may seem counter-intuitive considering New Zealand’s recent level of high inflation, the aim of the move was to counter-balance the oncoming times of credit tightening and fears. Governor Alan Bollard said in a statement, that New Zealand is likely to face an oncoming time of low export demand and decreased levels of credit availability. He also predicted a time of decreased consumer and business spending, justifying the OCR rate cut decision. According to a statement released by the Reserve Bank, this will combine with the lowering in oil prices, one of the biggest contributors to recent inflation, to get the inflation level to its desired under 3% band by the end of 2009.

In terms of historical proportion, the OCR cut was of a significant level. Typical OCR movements occur in 25 point increments, rarely is a move of 50 points seen, and even more so for 100 points. It would seem from further comments made by Alan Bollard that the OCR will be reduced further in future months, pending the effect of current cuts and markets on inflation.

Local financial bodies are already responding to the news, with Kiwibank lowering its rates on the day of the announcement. The new variable rate for the bank’s mortgages would be set to 1% lower, at 8.7%. The two and one year premium rates have also fallen to 7.79% and 7.99% respectively.