Rates cut: Six things you need to know

Homeowners may feel relief after the Reserve Bank cut its official cash rate by 25 basis points to a record low of 2.5 per cent. Most economists had expected the bank to cut its rate, but market pricing suggested that there was some difference of opinion. ANZ Bank, New Zealand's biggest bank has cut its rates, reducing its floating home rate by 25 basis points to 5.74 per cent. The Reserve Bank said growth in the New Zealand economy had softened this year, due mainly to lower terms of trade. Source: RBNZ

Reserve Bank Governor Graeme Wheeler has cut the official cash rate to a record low of 2.5 per cent. We've also heard from him on state of the economy and outlook for next year. Here's six things we learned:

1. The Bank is still more worried about the housing bubble than deflation.
Graeme Wheeler and his team remain steadfast in their view that inflation will return to the mid-point of the target band (2%) later next year. They accept that they could get it back there quicker if they cut rates further. But they were quite explicit about fears that this could exacerbate the already overheated Auckland property market. There are plenty of critics out there that think the Bank is being too conservative. Both ASB and Westpac economists pick inflation won't rise and there will be further cuts in 2016.

2. The Bank is well aware that it can't please everyone.
"Monetary policy decisions are always tricky, partly because nearly everyone in the country seems to have a view," Wheeler said today.
It was a throw away line but a revealing one. It is literally impossible to please everyone with a rate decision. Savers want higher rates, borrowers want lower rates. Half the pundits think deflation threat is so serious they should cut harder, the other half think they are fuelling the housing bubble with the cuts they have made Exporters want cuts to help bring the dollar down. Importers and retailers prefer the opposite.
Still, nice to be reminded we still live in a country where people care about economics, it makes a change from the flag and the football.

3. The dollar is still too high
The Governor and his team made it clear today that they are unhappy with the persistently strong level of the currency. What happened next won't have impressed them.

4. Currency markets are bonkers
The cut should have brought the dollar down but it didn't - it rose.We know currency markets are fickle, but to have the dollar rise by a full US cent on a rate cut just highlights how unpredictable they are. In this case the market was more interested in forecasts, which looked pretty positive and suggest there will be no further cuts next year. What the market didn't pay any attention to was the big risks the Bank highlighted and a specific reference to the possibility that "the Bank would reduce rates if circumstances warranted".
There isn't a wasted word in a Monetary Policy Statement and those words wouldn't have been there if the bank was feeling entirely optimistic.

5. There are four big risks
The bank has highlighted four key risks for New Zealand's economy.
• A slowing China and weaker global growth
• Dairy prices staying low
• El Nino summer bringing a drought and cutting GDP growth
• Immigration staying high longer and increased consumption off the back of house price boom.

When pushed to highlight the most serious Wheeler hedged his bets alluding to the first three. The fourth is less immediate and is less of a slowdown issue and more of a boom bust risk.

Reserve Bank economist John McDermott made the point that it isn't that often that a Monetary Policy Statement has that many risks in it. On that basis it would naive to think the Bank is being a PollyAnna about the economy.

6. The Reserve Bank Governor didn't go to the Parliamentary Press Gallery party
Probably just as well given it was the night before his big decision. But he was kind enough to acknowledge the hangovers of the Wellington media contingent.