Leading the foray in pre-OCR cuts is Kiwibank, being the first to announce on the 19th of February that they would yet again be reducing rates. They were soon followed by Westpac Bank, other banks are yet to make similar statements.

The Kiwibank variable home interest rate has been reduced from 6.49 to 5.99 percent. As early as five month ago this figure was at 10.22 percent. Kiwibank has set their home loan interest levels at the lowest they have been since the bank’s inception. Similarly, Westpac has reduced their rate to 6.49 percent.

In regards to the cut, Kiwibank Chief Executive Sam Knowles has stated that the current interest rate market is extraordinary. His Westpac counter part, Bruce McLachlan is saying that the market is already pricing in the anticipated interest rate cuts, although numerous uncertainties about the move are still present.

ANZ National Bank, BNZ and Kiwibank have all cut their home loan rates on the 14th and 15th of January, other banks are expected to follow. It is expected by many that the New Zealand reserve bank will cut the OCR by another percentage point in its next meeting. The current rate is 5%. Westpac bank went so far this week as to predict further post January cuts which will see the rate drop to 2.5% in 2009.

The new speculation of cuts is based on economist’s analysis of the New Zealand economy. Even with upcoming tax cuts, newly installed tax credits and the upcoming “Summit on Employment” aimed at stimulating the economy, many predict stark times ahead.

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.

In a speech given in Tauranga on the 20th of October Winston Peters, proposed that the Kiwibank be used as stand-alone commercial bank, separate from the Government. Further to his plan, the bank would handle of the Government’s business, which he valued at $55 billion, and the shares in the bank could only be held by New Zealanders. Winston Peters claimed that this would help profits from this activity stay in New Zealand and force interest rates to lower.

It would seem that this plan has been forming for at least a week, as Winston Peters hinted at revolutionary measures to reduce interest rates while at a speaking engagement at Waikato University a week earlier.

Naturally the proposal came under quick fire from opposing parties. Green Party co-leader Russell Norman claimed that the measure will lead to overseas ownership of Kiwibank. While the leader of the Progressive Party, Jim Anderton, claimed that Winston Peters was a serial asset-seller. At the time of writing, neither National nor the Labour Party had made comment on the proposal.

The scheme was announced by Finance Minister Michael Cullen and was brought in under the Public Finance Act. While he went on to say that the government has total confidence in the New Zealand banking sector, the initiative was to ensure confidence from both banks and New Zealand investors. The move follows similar schemes adopted recently by Ireland and Australia.

The Deposit Insurance is currently is pegged at $150 million dollars, and is an optional opt-in scheme, and is planned initially for a two year time period. Currently registered banks and deposits by institutions like building societies and credit unions are eligible for the scheme.

At the time of publication ASB, Westpac and Kiwibank have all indicated that they will participate in the scheme.