KEY POINTS:
The drop in the official cash rate has been welcomed by business and worker groups but has been used to highlight concern with monetary policy.
The Manufacturers and Exporters Association (NZMEA) said the move was a good one but it highlighted the effect on the exchange rate as
amplifying the boom-to-bust economic cycle that will continue to damage the tradeable sector.
"We saw a 50-point cut as necessary to provide some relief for the economy but conditions are still getting worse," association chief executive John Walley said.
"We need to see more cuts sooner rather than later. Let's just hope that the High Street banks don't hold on to the extra margin for too long."
He did not expect to see extra spending; debt reduction and savings were the new priorities.
Fluctuations in the New Zealand dollar caused by the use of interest rates to control inflation have been punishing the tradeable sector for some years.
High interest rates attracted speculative foreign investment, driving up the exchange rate and making conditions difficult for exporters.
When the economy started to slow due to high rates, the Reserve Bank cut the OCR, the foreign money left and the dollar dropped.
"This continuing exchange rate rollercoaster deters long-term investment in the tradeable sector, as businesses cannot accurately predict their returns."
It was difficult to see how the negative effect on the tradeable sector could be justified when the Reserve Bank was not even meeting its own targets.
"Inflation has been outside the target band for some time now and the economy continues to shrink.
"There are other inflation control mechanisms available and they are worthy of serious consideration,"
The Engineering, Printing and Manufacturing Union welcomed yesterday's cut as a step toward easing pressure on exporting manufacturers but called for a rethink on monetary policy.
National secretary Andrew Little said a series of redundancies in manufacturing over the last few years had been blamed in most cases by employers on the high dollar.
"The simple fact is that high interest rates mean a high dollar and that often means our export manufacturing being priced out of the global market. While it is good to see the rate coming down the fact is that it has been too high for too long because the single-lever monetarist model is a dreadful way to regulate inflation."
Auckland Chamber of Commerce chief executive Michael Barnett said the cut would not necessarily bring down business costs quickly but be a boost to business confidence.
"I don't think the business community is going to expect any big interest rate cuts from the banks, I think it is more about going in the right direction."
Ralph Penning, a trustee of small business umbrella group the Independent Business Foundation, said access to credit was a growing problem and the cut would not solve this problem.
"It's certainly a mixed blessing. I don't think it will improve the credit flow, that's what many of them are relying on.
"They carry mortgages in many cases over their personal assets which isn't necessarily the best way of doing it."
It's all about morale, says business owner
At Bay of Plenty specialist electricians Epulse Electrical, morale among the 12-strong workforce was boosted immediately following the interest rate cut announcement.
"It's the best news we've had in months," said managing director Allan Coe. The cut would eventually flow into the interest on the business' overdraft but more critically in the Bay was the wider impact on commercial and residential building which had been dealt a blow by the downturn.
Coe said his own firm's earnings had been hit over the past few months and high interest rates had been affecting staff who had mortgages. "From their point of view it's all about morale."
