On March 10th the Reserve Bank of New Zealand announced that the Official Cash Rate (OCR) is being dropped by 0.5 percent to a level of 2.5 percent. The adjustment comes as the first rate change after four separate OCR assessments.

Reserve Bank Governor Alan Bollard attributed much of the rate cut decision to to the recent Christchurch earthquake, and the associated negative economic effects. He said that there has been a deep disruption to typical business activity, and at this stage there is little indicative information about how long the impact will last. Alan Bollard went on to say that even before the occurrence of the earthquake, a cut in the OCR was being considered. He said that GDP growth has been weaker than projected, with retail spending and residential investments levels both declining.

While speaking about the future OCR outlook the Governor said that the Reserve Bank has had to make this decision with limited economic information, and the effects of the change will be monitored closely to ascertain the best course of action.

Banks in New Zealand have already cut their floating rate mortgage rates, with Kiwibank’s rate falling to 5.65 percent from 6.2 percent, and ASB slashing to 5.75 percent from 6.2 percent. The NZD has dropped throughout the day, starting at 0.7390 and dipping to as low as 0.7350 at approximately 11.30 am.

Photo by Frédérique in NZ

On December 9th the Reserve Bank of New Zealand announced that the country’s Official Cash Rate (OCR) will remain unchanged at 3.0 percent. The OCR has remained at 3 percent since July 29th 2010.

At the OCR announcement Reserve Bank Governor Alan Bollard stated that the interest rate is expected to rise slower than previously projected over the next two years. This decision has been attributed to a slowdown in economic growth, and a weakening in several market indicators. He explained that household spending is weaker than expected, national corporate “investment intentions” are below average and the housing market is more placid than estimated. Alan Bollard added that the New Zealand Dollar has greatly appreciated since the last GDP and inflation estimates were made, altering the country’s perceived economic performance.

It is expected that the OCR will not undergo any significant revision in the short-term, or until New Zealand’s economic recovery becomes more robust and the country’s underlying inflationary pressures show stronger signs of increase.

The Reserve Bank currently projects that New Zealand’s major export partners will experience a significant economic pick-up in the mid-term, pushing up demand for New Zealand export goods. Additionally, the repairs required for the recent Christchurch earthquake disaster are expected to make a significant positive impact to near-term GDP, eventually pushing up the interest rates.

Photo by DMWyllie

New Zealand has continued down a path of a relatively healthy economic recovery in recent months, despite a small slowdown in selected growth figures. On July 29th Allan Bollard, Governor of the Reserve Bank, revealed that the current conditions are adequate to warrant a slight withdrawal of stimulus policy and a 25 basis point increase the Official Cash Rate (OCR). The rate will now be 3.0 percent.

New Zealand’s near and medium-term forecasts for GDP growth remain strong, riding the confidence of the manufacturing industry and the forestry sector’s resilient growth. Business investment is also expected to pick up over the medium-term, with a great positive impact on national growth. However, the Reserve Bank has revealed that domestic demand is marginally lower than during the previous OCR adjustment, with public spending and household credit showing dampened growth. Additionally, business investment is below previous forecasts.

Despite the handful of decreased growth predictions, Alan Bollard maintains that the latest OCR increase is justified. Even at its adjusted level, the OCR is still very supportive of economic growth, although the pace and extent of future rate movements will need to be reexamined. The Reserve Bank Governor did note that with the new OCR and the Government’s upcoming GST rate increase, national inflation could temporarily climb above 3 percent. However, the effect is expected to be short term, and the Treasury will monitor its effects closely to ascertain the complete economic impact.

Photo by Brenda Anderson

On June 10th the Reserve bank of New Zealand (RBNZ) announced the first change in New Zealand’s OCR since April 30th 2009. At the latest OCR review, the rate was increased by 0.25 percent to a new level of 2.75 percent. The rate has remained unchanged for the last 8 OCR review sessions.

Alan Bollard, Governor of the RBNZ, explained the change, saying, “…the economy has entered its second year of recovery with growth becoming more broad-based.” The alteration has also been attributed to the strong recovery of the New Zealand’s key economic trading partners, especially the Asia region, Australia, and the US. Local economists expect several more upwards adjustments throughout the 2010 year, barring an unexpected downturn in the global financial situation. The Governor added that the OCR will be reviewed and adjusted in line with the withdrawal of Government stimulus measures, as dictated by the economic environment.

According to Alan Bollard, economic growth is expected to reach 3.5 percent throughout the 2010 and 2011 years. The growth is attributed to an improved demand for export goods, a rising labor market, along with residential and business investment.

Photo by Frederic Poirot

On March 1st, the NZIER released the March 2010 Quarterly Predictions report, which stated that although New Zealand is no longer facing a recession, its economic recovery will be slow and “jagged”. Growth of only 2.7 percent was projected for the 2010 calendar year, and 1.4 percent for 2011. Shamubeel Eaqub, NZIER Principal Economist, stated that several key economic indicators, both internationally and locally, are giving cause for concern and calling for restraint on any recovery estimates.

According to the report, the New Zealand Reserve Bank does not yet have any reason to raise the Official Cash Rate (OCR) yet, though the move should be considered in September. Unemployment in 2010 will peak at 7.5 percent, compared to 7.3 percent in December 2009. Further, constraints in wages will be seen for another 12-24 months. Household spending is projected to experience a slow recovery. The report also claimed that the housing sector will experience slow growth, and be hampered by rising mortgage rates.

Shamubeel Eaqub admitted to a certain amount of uncertainty in regards to any economic projections made, as there are renewed signs of flagging consumer confidence both within New Zealand and internationally. Additionally, yet to be announced tax regime changes lend a level of unpredictability to the growth and recovery possibilities of New Zealand.

Photo by pfala

At the quarterly Reserve Bank OCR Review, on January 28th, it was announced that the rate would remain at its current level of 2.5 percent. Alan Bollard, Reserve Bank Governor, said that the decision comes as a result of the economy remaining consistent with projections made in the December Monetary Policy Statement. He continued on to say that the annual CPI inflation is situated squarely in the target band and is expected to remain within the area over the medium term.

The New Zealand OCR has remained at 2.5 percent since April 30th, 2009. It has been unchanged through six OCR review announcements. Economists predict that the rate will be raised in mid-2010 if evidence surfaces regarding the sustainability of New Zealand’s current economic recovery.

Expanding on his decision, Alan Bollard explained that rising economic conditions across the world are driving the price of New Zealand commodities higher, aiding in the country’s recovery. Though the Governor expressed concern regarding the ability of Australia and Asian nations to maintain their economic upturns. Further, he claimed that the New Zealand Government’s fiscal and monetary stimulus policies have aided the country’s recover, but could be withdrawn in mid-2010, as the need for them declines.

Photo by 350.org

On the 29th of October it was revealed that the Reserve Bank of New Zealand has decided to maintain the New Zealand OCR at 2.5%. The review was the fourth which had led to an unchanged OCR, the last alteration being on the 12th of March 2009.

According to Alan Bollard, Reserve Bank Governor, there seemed to be no reason to withdraw the monetary policy stimulus. Further, New Zealand’s inflation is currently on par with the Reserve Bank’s 1-3% inflation aim. Although it was stated by the Reserve Bank Governor that the current level of the New Zealand dollar is hindering the countries recovery. He said “The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery and reinforces a bias toward domestic expenditure,” Bollard said. “The current composition of growth continues to raise questions about its sustainability. These concerns would intensify if credit growth began to propel stronger domestic demand.”

For the second review in a row Reserve Bank Governor Alan Bollard has opted not to increase the Official Cash Rate (OCR) of New Zealand. The change came as no big surprise to commentators or market participants, with no movements of particular note to be seen on the foreign exchange or equity market.

In regards to the decision, Alan Bollard, in a Reserve Bank release said “Despite signs of a leveling off in economic activity, the economy remains weak. We continue to expect to see a patchy recovery get underway toward the end of the year, but it will be some time before growth returns to healthy levels.” He went onto say that while most factors seemed to be close to the June Monetary Policy Statement estimates, the level of the New Zealand dollar was cause for some concern at the current time.

The New Zealand OCR as set by the Reserve bank is currently at 2.5%. With an end seemingly in sight for New Zealand and the recession it is now facing, there is no obvious need for further reductions in the OCR, which is already at a record low level.

A survey conducted by Reuters of 16 analysts has resulted in 15 voicing an opinion that there will not be a further cut on the 30th of July. Only one projected a decrease of 25 basis points.

It was voiced that the economy seems to be on the verge of a state of recovery, which entails the Reserve Bank holding some concerns regarding possible side-effects of debt based purchasing as is seen currently in the economy.

Even while according to a Reuters poll of 21 economists only 13 thought that an OCR decrease was likely, it has been cut by 25 basis points to 3%. According to a Reserve Bank of Australia media statement, the Australian economy is shrinking (albeit not as fast as some of its trading partners), as such the newest cut is warranted.

Similar action is looking increasingly likely after the same day publication of the Quarterly Survey of Business Opinion (QSBO) by the New Zealand Institute of Economic Research (NZIER). The New Zealand OCR cut would seem warranted, or at least called for, due to the new information showing 47% of firms reporting a fall in their business activity, as opposed to last December’s 44%.