The Reserve Bank has cut official interest rates to 2.75 per cent, with banks quickly following suits and cutting their floating mortgage rates.

A cut in the official cash rate by 25 basis points was widely expected but what the Reserve Bank does next is less clear.

Most economists expect the bank to now retain an easing bias, with some tipping the rate to drop to 2 per cent by early next year.

Immediately following the Reserve Bank announcement, the New Zealand dollar dropped by about US1c.


Reserve Bank optimistic on Auckland housing
Reserve Bank cuts OCR to 2.75 per cent
Dollar falls on OCR cut

Kiwibank cuts its variable and revolving (floating) mortgage interest rates, matching the 0.25 per cent reduction and bringing floating rates down from 6.15 per cent to 5.9 per cent.

Kiwibank said the reduction was immediate for new customers and would take effect in two weeks for existing customers.

ANZ said in response it would lower interest rates on its floating and flexible home loans, also by 0.25 per cent - bringing its floating home loans rates down to 5.99 per cent and flexible home loans rates down to 6.1 per cent.

ANZ's new rates for new ANZ Floating Rate Home Loan customers would take effect from Monday, September 14 and for all existing Floating Rate and all Flexible Home Loan customers from Monday, September 28.

Westpac lowered its floating mortgage rate to 6 percent, which it said reflected to "competitive" home loan market.

ASB Bank matched the 4.35 per cent special one-year rate the BNZ unveiled last week. It is the lowest home loan rate New Zealand has seen since the 1960s.

It announced later today that it has lowered its variable home loan and Orbit home loan rates by 0.25per cent from 6.25 per cent p.a. to 6 per cent p.a.

These changes are effective Wednesday, September 16 for new customers and Friday, September 25 for existing customers.


Reserve 'doing all the heavy lifting'

Labour's finance spokesman Grant Robertson said the decision to cut the OCR - despite the "out-of-control" Auckland housing market - showed the Reserve Bank was "doing all the heavy lifting".

"Graeme Wheeler knows the economy is drifting. That's why he's cutting the OCR, despite knowing that risks adding to Auckland's out-of-control housing market, which he describes as worrying."

Mr Robertson said Finance Minister Bill English was ignoring the warning signs, while others such as the Reserve Bank had turned to Plan B.

"Graeme Wheeler isn't a lone voice on this. Bank economists are ringing alarm bells and the Treasury has been sending briefing notes warning the Finance Minister the downside Budget scenario on the economy is turning into reality.

"Plunging dairy prices, exports falling, regional economies already going into recession and a housing market that threatens banking stability are big issues that are happening right's for the Finance Minister to deal with them."

In contrast, the Green Party focussed on the "mistaken" OCR rises of 2014 - saying the reversal of much of that decision as the economy softened showed the need for the Reserve Bank's governance to be reformed.

"Concentrating this power in just one person isn't the right way to make good decisions," the party's finance spokeswoman Julie Anne Genter said.

"We'd like to see the Reserve Bank's decision-making power broadened to more than just one person - decision making by a panel of experts from across the economy would be in line with what happens in other OECD countries."

'Plenty left in the tank'

At a press conference this morning, Wheeler was asked if increasing the OCR by 100 basis points from March to July 2014 had been a mistake.

He said it had not, and the Bank could only assess the information available at the time, which included high export commodity prices, increasing construction activity and rising net immigration.

The economy had since adjusted to a sharp decline in export prices, and construction activity in Canterbury had plateaued. At the end of this year the growth rate is projected to be just over 2 per cent, down from a rate of 3 per cent a year earlier.

However, the Reserve Bank expects that lower interest rates, together with a lower exchange rate and recovery in export prices will see growth pick-up from next year and reach a projected 3 per cent in early 2018.

Asked about whether the Government could need to run deficits in the coming years, Wheeler told media that the OCR could be reduced further if necessary, and New Zealand was in one of the best positions in the developed world if more spending was needed to stimulate the economy.

"There's plenty left in the tank."

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The Reserve Bank, whose central goal is price stability, has had little to worry about on the inflation front in recent years.

The bank defines price stability as annual increases in the consumers price index of between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.

The last time inflation got close to 2 per cent was in calendar 2011, when it rose by 1.8 per cent on the CPI.

Very low oil prices, and up until recently a New Zealand strong dollar, have helped to put a lid on inflation. In the oil markets, benchmark West Texas Intermediate last traded at US$45 a barrel — half the price of where it was a year ago.

Read the Reserve Bank's monetary policy statement here: