KEY POINTS:
Lowering the official cash rate will make mortgages cheaper, but don't expect it to cushion the impact of the international financial crisis, says one banking expert.
Massey University's centre for banking studies director David Tripe told the Herald yesterday's rate cut would reduce homeowners' mortgage payments and perhaps
boost business confidence in the short term, but those effects "will be not necessarily huge".
Wider economic anxieties - not least the value of the properties on which they held mortgages - would continue to worry people.
"There still ends up being a significant problem in that people are concerned about economic events.
"They are no longer in a situation where they can count on continued increases in property prices to make them feel wealthy."
Reserve Bank Governor Allan Bollard yesterday chopped the official cash rate - the bank's wholesale interest rate - by 150 points, to 5 per cent.
The 1.5 percentage point cut is the biggest since the official cash rate was introduced in 1999 and follows the previous record cut - 100 points - in October.
The rate has not been at 5 per cent since December 2003.
The move set trading bank lending rates falling, starting with ASB which cut its floating mortgage rate from 8.7 per cent to 7.95 per cent.
Repayments on a 25-year, $300,000 floating mortgage will fall by $150 a month.
The down side is that banks will also cut the interest rate they pay on savings.
Dr Bollard's announcement came with a warning to banks to be quick in passing the cuts to borrowers.
"We expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers," he said.
Dr Tripe echoed his comments, saying present levels of bank mortgage rates relative to the official cash rate and the 90-day bill rate left significant scope for a reduction.
But Business NZ chief executive Phil O'Reilly said he became "a little annoyed" hearing others trying to tell banks what to do.
"We need to be quite careful about pressuring the banks to act in inappropriate ways ... potentially making them less healthy than they are."
Mr O'Reilly agreed in principle with Dr Tripe that the cash rate reduction was "not a silver bullet" to fix the economy.
He said many people might welcome lower mortgage repayments, but they could at the same time be anxious about their jobs, and less willing to spend any mortgage savings.
"They are going to be conservative about what they do."
He described the rate cut as "helpful, but not sufficient" in itself, and said the Government needed to be "mates" with the Reserve Bank by limiting its own wasteful spending.
Mr O'Reilly and Dr Tripe believe consumers will probably be careful with the mortgage reduction benefits, choosing to hang on to at least some of the savings.
And the same was likely to happen with the next round of tax cuts, in April, Mr O'Reilly said.
"When mortgage rate cuts and tax cuts take place ... what you tend to find is some people spend it all, but quite a few people spend a bit and save a bit."
The Reserve Bank also hinted yesterday that further cuts could be made to the cash rate.
In its December monetary policy statement, issued yesterday, the bank said "some further, but significantly smaller, reductions in interest rates may be warranted ..."
The statement said gross domestic product was expected to have contracted further in the September quarter, the third consecutive quarterly decline.
As well, further contraction early next year was "quite possible".
Dr Bollard said New Zealand went into a "very shallow" recession early compared to trading partners, and had been in a shallow recession throughout this year.
Though the Reserve Bank believed New Zealand's recession had ended, there would probably be "very low growth" for the next year, he said.
- additional reporting NZPA
