Bollard cuts interest rates - but what will the banks do now?

The Official Cash Rate was this morning cut for the first time in five years but homeowners might have to wait for their mortgage rate to follow suit.

Reserve Bank governor Alan Bollard this morning cut the OCR by 25 basis points, taking it down to 8 per cent, the first of an anticipated series of interest rate cuts.

But, since most banks fund much of their lending on international markets - which have tightened drastically as a result of the global credit crisis - the OCR may have little immediate effect on mortgage holders.

Confirming this impact was the announcement by the BNZ today that it was raising the interest rate it charges for overdrafts - with personal, business and farm overdraft rates increasing 25 basis points - the same amount as the Reserve Bank cut the OCR this morning.

Kiwibank, which has led other markets down with interest rate cuts this year, said today it would not immediately cut rates further as a result of the Reserve Bank's move.

Spokesman Bruce Thompson said the state-owned bank had essentially anticipated the Reserve Bank's move today with its earlier cuts.

Kiwibank has the advantage that it funds purely on the domestic market and with many finance companies failing, investors have been heading to the relative safety of the Government-owned bank.

ANZ National chief economist Cameron Bagrie said the wholesale curve influenced by the Reserve Bank was only one factor that influenced mortgage rates. The other was international volatility, he said.

"The cost of credit has gone up a long way. Because we run a current account deficit, we need to borrow money overseas and that is going to have a direct cost overseas," Bagrie said.

He said retail mortgage rates would be assessed on a week by week basis.

"It's a competitive market. Everybody will be closely watching what competitors do. People will be watching how far wholesale interest rates move and people will also be looking at what is happening around the globe," Mr Bagrie said.

That will be disappointing news for the increasing numbers of "middle New Zealand" families seeking out the services of Family Budgeting Services.

Executive officer Raewyn Fox said families with combined incomes of between $40,000 and $100,000 are now asking for help. Previously budgeting service providers would have dealt with renting families on low incomes but that is now changing.

"People who come to us tend not to come until they are really in strife, they need some reorganising or relief of some kind," Fox said.

She said people are also being realistic and making big decisions such as getting rid of a car, downsizing their house or even selling the house and going into a rental property.

"As well as the mortgage pressure, there's also the food pressure and petrol pressure," Fox said.

Chief Executive of the Manufacturers and Exporters Association John Walley said this morning's cut would provide "much needed relief for exporters" but pointed out that continuing cost pressured remained, which reduced the efficacy of monetary policy controlling inflation.

"As the OCR moves down it is likely that domestic interest rates will lag but the exchange rate is already falling which will, at long last, start to improve exporter returns on US dollar sales. Unfortunately it will also increase the cost of imported goods as mentioned in today's statement from the RBNZ," said Walley.

"The problem for policy makers is that the OCR is having little affect on the domestic economy. Banks are struggling due to the global credit crunch so they are not likely to drop their rates any time soon," said Walley.

"In the medium to long term we will see another damaging cycle with volatile exchange and interest rates, making it difficult for those involved in the tradeable sector to invest with any certainty."

"If we want our living standards to match our peers then there needs to be a focus on our real economy and a plan to reduce our trade balance deficit. We need to see a policy framework that supports our tradeable sector."

Recession threat

Most economists had agreed the Reserve Bank was poised to start a new easing cycle, but had said it was too close to call whether Dr Bollard would begin it today or wait until September.

In a statement, Dr Bollard said the rising threat of recession prompted him to make the move today.

"Economic activity is likely to remain weak over the remainder of 2008," he said.

"The ongoing correction in the housing market, together with the very high oil prices, will limit household spending and constrain the extent of recovery," he said.

"However, high export prices and an expansionary fiscal policy are expected to contribute to a gradual pickup in activity through 2009."

Markets

The sharemarket reacted positively to today's rate cut with an immediate 1.2 per cent rise in the NZX50, building on yesterday's 1.8 per cent jump. It is currently up more than 1.7 per cent.


- EDWARD GAY, CHRIS DANIELS, NZPA

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