Reaction to this morning's record 1.5 percentage point cut in the Official Cash Rate:
KEY POINTS:
UBS senior economist Robin Clements:
The RBNZ did what they needed to do now, not disappointing the market and shifting policy to an expansionary setting.
* But, it looks to us as if they are keeping some 'room to move' i.e. had they been even more pessimistic it would have required a far lower OCR trough, perhaps something they don't want to signal just yet.
* If growth and inflation are lower than the RBNZ expect (as we would anticipate), then cuts from the RBNZ may still be bigger that currently suggested from the RBNZ and the tough lower.
* At this point we still with a near term OCR target (and low point) of 4.5 per cent. However, it seems a 50bp cut in January is clearly possible and, if so, there is a risk of another cut in March that would take the OCR below 4.5 per cent. As the RBNZ says, the OCR trough will be dictated by global developments.
ASB Bank economists:
The bold move and accompanying statements suggest that the RBNZ are very concerned about the economic outlook and continue to see risks firmly skewed to the downside.
This was highlighted by the fact that the decision to cut 150bp was made almost 2 weeks ago; suggesting market pricing had little to do with their ultimate decision. The RBNZ acknowledged downside risks to their forecasts finalised just 2 weeks ago, which implicitly incorporated a 4.5 per cent OCR, as overseas conditions continue to deteriorate.
In today's press statement the RBNZ noted that "ongoing financial market turmoil and the marked deterioration in the outlook for global growth have played a large role in shaping today's decision."
The RBNZ sees the economic outlook deteriorating significantly as a result of the credit crisis, and is continuing to actively front load rate cuts.
Although the RBNZ has tried to temper future rate cut expectations, as we see downside risks to their economic forecasts we expect reasonably bold action to continue. We expect a 100bp cut in January, followed by a 50bp cut in March, which will bring the OCR to 3.5 per cent.
Brian Jolliffe, Managing Director, MARAC:
"On the back of today's cut to the Official Cash Rate, it's a good time for investors who rely on income from fixed interest investments to seek advice on making the most of their money going forward as interest rates are likely to continue falling. Investors should consider locking in longer terms on fixed interest investments to take advantage of higher long term rates."
"New Zealand has had very high interest rates by international standards and this has given the Reserve Bank the ability to cut the OCR significantly. Hopefully the knock-on effect of this rate cut will help alleviate some of the financial pressures felt by many New Zealanders and provide stimulus to the economy at a time when it is needed."
"Many small businesses have been struggling over the last six months with lower demand, increasing raw material and wage costs, and high interest rates. We expect the OCR cut on top of previous reductions will flow through to lower borrowing rates for most businesses and will come as a welcome relief as they enter the New Year."
Business NZ Chief Executive Phil O'Reilly:
The Reserve Bank's decision to drop the OCR 1.5 basis points was appropriate in light of recent events
"International inflation has dropped because of the drop in global demand, especially for oil and commodities including dairy.
"However there are still concerns over inflationary pressures in the non-tradable sector.
"While encouraging economic activity with lower interest rates, it will also be important to keep a rein on spending blowouts in local government and in areas of central government monopoly control such as ACC.
"Moreover producer input prices are still high - up 3.7 per cent for the September 2008 quarter - and the Labour Cost Index is still recording record growth.
"There is still great need to ensure the economy is as competitive as possible."
Deutsche Bank researchers:
& our initial reaction is that the Bank's move was appropriate given the rapid deterioration in the global outlook. We do, however, think the Bank's tone is aimed at winding back expectations that OCR reductions will continue to be as aggressive as recently.
We think the Bank will ease by more than currently projected because we think the economy will be much weaker than the Bank expects. Despite this we actually have inflation tracking higher than the RBNZ. This reflects our view that the growth/inflation tradeoff is worse than the Bank believes.
If growth was to accelerate as rapidly as the RBNZ projects then we think inflation would rise quite rapidly and thus force the Bank to tighten much more aggressively than projected in 2010.
But that would be a nice problem to have given current circumstances! There is a lot more bad news to navigate before this becomes an issue.
The market reaction 30 minutes after the MPS has been subdued. Front-end rates have rallied a couple of basis points and the TWI (Trade Weighted Index) is close to unchanged.
- HERALD ONLINE
