KEY POINTS:
Another mega rate cut from the Reserve Bank yesterday has pushed down
economists' expectations of how low the official cash rate will finally go to the 2 to 2.5 per cent range from 2.5 to 3 per cent previously.
Wholesale interest rates fell - the one-year swap rate
by 30 basis points - and the kiwi dollar fell a cent to US52c.
Westpac chief economist Brendan O'Donovan, one of only two forecasters to pick the 150 basis points cut delivered, said governor Alan Bollard had shown he was prepared to do what it takes in the face of a "horrendous" outlook for the world economy.
Yesterday's cut takes the OCR to a new low of 3.5 per cent.
Bollard, who two months ago was prepared to speculate that the economy might be coming out of recession, now believes it will last until the middle of next year. And "huge uncertainty" about the timing and strength of a recovery remained, he said.
He was asked how low the OCR could go before he was flogging a dead horse.
"Provided the banking system is working satisfactorily - which it is - and provided households are borrowing - which they still are, and businesses too - we are not really in that territory which some people might characterise as pushing on a string by trying to push rates down further," he said.
"We think monetary policy is quite effective at these levels."
Bollard has cut the OCR a whopping 400 basis points in the past three months, and by a cumulative 475 points since he started easing in July.
"The market thinks it will go a little lower. They may be correct in that. It really does depend on international circumstances and conditions," he said.
"We have always said we expect to to be in a position to keep some ammunition in reserve. That's still the case."
Financial markets are now pricing in a further cut of at least 75 basis points on March 12, according to Credit Suisse's swaps-based indicator.
BNZ head of research Stephen Toplis believes the cash rate will trough at 2 per cent. The central bank would be reluctant to push rates so low that conventional monetary policy was no longer an option - as is the case in the United States.
"But we are very concerned that too much weight is being put on the power of interest rates to fix things," Toplis said.
"In normal times lower interest rates provide householders with more spare cash to go out and spend, and in turn stimulate the broader economy. At the same time investment activity is promoted."
In the current environment, however, any cash relief was more likely to be saved by households and businesses alike - substantially dampening the impact of falling interest rates.
Bollard said monetary conditions were now "very stimulatory" by historical standards, and when combined with a lower exchange rate and fiscal stimulus that would have a positive impact on growth.
Provided, that is, that firms and households did not unnecessarily reduce their spending. And provided banks passed on lower wholesale interest rates to their borrowers. So far they had "largely but not entirely" done so, Bollard said.
Growth in borrowing by households has slowed markedly over the past year. It grew just 4.2 per cent over 2008, compared with 12 to 13 per cent over the previous two years.
Business borrowing at 12.2 per cent was little changed on 2007's 12.7 per cent.
O'Donovan said that unlike some other countries New Zealand still had a functioning financial sector.
"So long as it does, monetary policy will continue to be effective. But if access to foreign funding closes we will have a different environment to deal with and [Bollard] will have to look at greater use of quantitative measure rather than interest rates for stimulatory purposes."
ANZ National Bank chief economist Cameron Bagrie said offshore credit markets were starting to free up in terms of banks being able to raise money - but price was a big issue, he said.
Bollard said banks had sufficient liquidity and he expected them to make use of the Government guarantee for longer-term debt issues within the next couple of months.
Room to move
* Governor Alan Bollard cut the OCR 150 basis points to 3.5 per cent - the high end of market expectations.
* He had plenty of room to cut more, he said.
* Further cuts would depend on the international outlook and on how New Zealanders responded to the stimulus already in place.
* He urged households and businesses not to cut back spending any more than necessary.
