Fran O'Sullivan: OCR cut good and bad for Key

By Fran O'Sullivan

Prime Minister John Key will view the Reserve Bank's historic interest rates cut with mixed feelings.

The unprecedented 150 basis points will ease pressure on Key's Cabinet to follow other nations by "throwing the sink" at the economy with even more fiscal stimulus.

But Governor Alan Bollard's warning 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" will cause Key's team to take another stock-take on just how much tax revenue the Government can expect next year to fuel its operations, and, whether it will have to borrow more than currently planned to stimulate the economy.

After three days of negotiating Labour's carefully planted political time bombs (the disgraceful situation National has inherited where neither of the Air Force's two Boeing 757s are available for emergency use, and, the cynically orchestrated way in which Labour buried a $1 billion ACC shortfall) it's little wonder that the Prime Minister and his top economic team will quickly seek to position Bollard's historic cut as a positive putting a brake on the run of new stories which have questioned his Government's crisis management expertise.

This position has been enhanced by this morning's release of the Treasury's brief to the incoming Minister of Finance on medium term economic challenges. English is sitting on the fiscal advice provided by treasury until early next year - an indicator of the intense volatility he is having to grapple with.

Finance Minister Bill English will no doubt instruct Treasury to calculate the exact impact of today's monetary policy, and, whether it result in an increase in consumer confidence.

This is a moveable feast.

Where Key's team will face some acute choices of their own is in responding to Bollard's nudge to bring a stop to the rampant increase of electricity prices which he isolates as one of the major domestic risks to getting inflation back within the 1-3 per cent target band as expected within the first half of 2009. Given the Government owns three of the four major generators it is within its grasp to direct the SOEs to forgo massive profiteering in the drive to get the economy turned around as fast as possible. This would require the Government to bypass extra profits from the SOEs to maintain economic growth.

Local Government Minister Rodney Hide will also regard Bollard's singling out of local body rates as the other key factor in keeping domestic inflation stubbornly high as high-level endorsement for his own plans to reorganize the sector in a more efficient fashion.

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