KEY POINTS:
Reserve Bank Governor Alan Bollard delivered the full percentage point cut in the official cash rate the market had been looking for and foreshadowed more easing to come - provided he sees evidence that "stubbornly high" domestic inflation pressures are abating.
His comments made it clear that while
the turmoil in international financial markets and the worsening outlook for world growth were front-of-mind in this decision, the bank is not happy to see non-tradeable inflation still running so hot.
He singled out the electricity sector, local authority rates, wages and construction costs as the main concerns there.
Bollard delivered the 100 basis point cut - the first since the OCR was adopted nearly 10 years ago - for several reasons.
First the markets had been expecting it since the Reserve Bank of Australia delivered such a cut two weeks ago. To have disappointed them risked sending wholesale interest rates higher.
Second he is only bringing forward OCR cuts he was already minded to deliver.
The economy has been in recession all year and the fallout from the international financial crisis means the bank now expects "a very slow pickup out of the current recessionary conditions".
Third, because of the preponderance of fixed rate mortgages and the banks' reliance on scarce and expensive imported funding, the official cash rate has to move further for the benefit to be felt in the mortgage belt.
"We would certainly expect to see some impact of this coming through on to mortgage rates," he said.
But as for how much, "It's a bit complex because the cost of funds has been pushed up significantly. In addition over the past few weeks we have seen some quite different responses from different banks to [OCR] cuts they thought might be in the pipeline. Some have already responded, some haven't. So it is hard to generalise."
While he expects to cut the OCR further over coming months, the timing and extent of further reductions would depend on "evidence of actual reductions in domestic cost pressures as well as how global financial developments play out".
On Tuesday Statistics New Zealand reported not only a headline inflation rate of 5.1 per cent, the highest since 1990, but non-tradeables inflation still running at 4.1 per cent.
ASB chief economist Nick Tuffley said wage inflation was a key influence there, especially in the services sectors. "Anecdotally the labour market is turning so we should see quite a shift in bargaining power."
Local body rates rose 5.4 per cent over the past year and while that was higher than general inflation it was lower than the previous year, Tuffley said.
Electricity prices, which Bollard mentioned several times, rose 6.9 per cent in the year to September and have been climbing in real terms relentlessly for at least five years.
While the bank sees a weaker growth outlook than it did back in September, Bollard pointed to several factors which would help. In addition to lower interest rates, fiscal policy has loosened, oil prices have halved from their July peak and the dollar has fallen substantially.
But ANZ National Bank chief economist Cameron Bagrie said that while oil prices were falling, so were export commodity prices and the overall terms of trade were deteriorating.
"We need a lower currency to address the external imbalance and fiscal policy is still somewhat constrained given the deterioration in the fiscal position," he said.
"At the end of the day all the shock absorbers - including monetary policy - can do is mitigate some of the extreme risks to the economy."
BNZ head of research Stephen Toplis said there were tentative signs that funding pressures banks face in global markets were easing.
That would take pressure off retail rates in New Zealand in due course. "But there's a lot of water to go under the bridge yet."
Westpac chief economist Brendan O'Donovan said the 100-point cut was "an extraordinary move but these are extraordinary times". The average US recession tended to last 10 months and be quite harsh, he said, and recessions preceded by financial crises were worse and longer.
RATE WATCH
* Alan Bollard cut the official cash rate an unprecedented 100 basis points, bringing the easing since July to 175 points.
* He sees "a flattish economy for a while" with "a very slow pickup out of the current recessionary conditions".
* While the weak growth outlook is foremost in his thinking he remains worried about stubbornly high inflation in the inward-facing parts of the economy.
