Reserve Bank Governor Adrian Orr has taken a big bet by slashing the OCR. Photo / File
The Reserve Bank stunned the financial markets today by cutting its official cash rate by half a percentage point to 1.0 per cent in a move previously used only in times of major crisis.
For the most part, the bank has in the past only shifted its official cash rate (OCR) by 25- basis-point increments.
It has only moved by half a point three times since the OCR system was introduced in 1999 - the aftermath of the September 2011 terror attacks on the United States, the global financial crisis, and the Christchurch earthquake.
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• Major banks cut rates, express concern at the impact for savers
ANZ chief economist Sharon Zollner said the half-a-point cut had the look of a crisis-like response.
"Today's bold move will result in lower retail borrowing rates that should support investment and the housing market, but there will be offsetting impacts on the incomes and therefore spending of savers, and one also can't rule out a perversely negative impact on confidence of what might look to some like a crisis-type response," Zollner said.
"There are two schools of thought when nearly out of ammunition: hide behind a rock and preserve it, or charge," she said. "The RBNZ clearly falls in the latter camp."
Market expectations were for a 25 basis point cut, with a follow-up 25 pointer in November.
Some economists still expect the bank to cut yet again in November, which would take the rate to 0.75 per cent.
By rolling the two largely expected rates cuts into one, the Reserve Bank wrong-footed the foreign exchange market, which sold the currency down by a full US cent to US64.5c, giving the export sector an unexpected bonus.
"To give the Reserve Bank credit, they have really front footed the fact that they were likely to forecast the need for another rate cut, and they have made the decision now rather than wait," ASB Bank chief economist Nick Tuffley said.
"Our view is that they will go again in November but it's going to be a fairly fluid situation," he said.
The Reserve Bank's move comes after extreme volatility on international markets in reaction to heightened trade friction between the world's two biggest economies - the United States and China, which economists say can only translate into lower economic growth if the situation worsens.
"The global risks do not look like they are going to recede anytime soon and it doesn't look like business confidence is going to rebound," Tuffley said.
Westpac chief economist Dominick Stephens said New Zealand markets were "stunned" by the cut.
The Reserve Bank also noted that New Zealand GDP growth had slowed, he said.
The central bank abandoned its previous forecast that house price inflation will soon pick up due to lower interest rates.
"We disagree on this point, and indeed today's decision will provide further fuel for the housing market," Stephens said.
The Reserve Bank has been loosening monetary conditions since June 2014, when it cut the official cash rate (OCR) to 3.25 per cent.
In its statement today, it said a lower OCR is necessary to continue to meet its employment and inflation objectives.
"Employment is around its maximum sustainable level, while inflation remains within our target range but below the 2 percent mid-point," the Reserve Bank said.
Annual inflation came to 1.7 per cent in the June quarter - below the Reserve Bank's 2 per cent mid point of its 1 to 3 per cent target range - and it is expected to trend lower as the economy slows.
The Reserve Bank's own forecasts show inflation dropping to 1.3 per cent in the September year, and remaining at under 2 per cent through to March 2022.
GDP growth had slowed over the past year and growth headwinds were rising, it said.
"In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets.
"Global economic activity continues to weaken, easing demand for New Zealand's goods and services," the bank said.
"Heightened uncertainty and declining international trade have contributed to lower trading-partner growth," it said.
The bank noted central banks around the world were cutting rates to support their economies.
Today's official rate puts New Zealand on equal footing with Australia's.