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.”

In a statement on the 10th of September, Alan Bollard, Reserve Bank Governor stated that he would support the introduction of a property speculation tax in New Zealand. He provided no firm mechanics on any such possible system, but a brief overview of the idea was described. Levies could be imposed on owner unoccupied housing, possibly immediately or if sold within a preset time period. The idea behind such a tax would be to rein in property speculation and balance the benefits of investing in housing with equal investments in the business sector. It was made adamant that any such system would not be imposed on owner occupied housing.

Opposition to the idea has already been voiced by the Business Roundtable and the Property Investors Federation. Both claim that the imposition of any such tax would not serve to yield any great profits or be an effective control for the housing market. Doubt was raised as to whether such a tax, if imposed at reasonable levels, would serve as a deterrent to property market speculation, or increase proportional investment in businesses.

While releasing the bi-annual Financial Stability Report, Alan Bollard disclosed the proposed new policy which is aimed at creating incentives for banks to diversify their reliance on funding sources. Primarily it is aimed at reducing the use of short-term wholesale as a source of funding, so as to reduce the bank’s exposure to market disruptions.

In the statement Alan Bollard maintained that he is positive about the state of the New Zealand financial system, despite the seeming financial turmoil that can be seen throughout the world’s financial institutions. He went on to say that the Reserve Bank would continue to implement measures in New Zealand to aid with financial stability.

The exact details or plans of what these new regulations and standards will consist of were not released at the conference.

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.

Although a cut in the OCR was predicted, most experts expected it to be a quarter of a percentage point. The substantially larger cut has been a surprise to the industry. Dr Bollard justified this move by citing what he called a “marked” slowdown in the local economy and a possible deterioration in the general global economy.

This is only the second time in five years that the OCR has been lowered. The last was in July, with a lowering of a quarter of a percentage point, from 8.25 percent.

It is expected that the move will result in a peak in inflation around September at a level of 5 percent, followed by a general downward trend in inflation figures.