Brash tries a shot in the arm

By BRIAN FALLOW

Don Brash has joined his international counterparts, albeit a day late, in cutting interest rates by half a percentage point.

The Reserve Bank Governor described the cut - which was earlier and larger than the financial markets had expected - as a precaution in a period of heightened uncertainty.

The immediate effect will be to put $30 a month in the pockets of borrowers with a $100,000 20-year floating rate mortgage.

The aim is to boost spending and investment within the New Zealand economy, to offset the harder times exporters and especially the tourist sector can expect as a result of the international situation.

Another aim is to bolster confidence for both businesses and consumers which "will be hurt by recent international and domestic developments".

The domestic developments Dr Brash has in mind probably concern Air New Zealand.

He also said that any downturn in the New Zealand economy might be relatively short-lived.

The implication is that if it turns out that way, the interest rate cut will be reversed quickly, maybe in the second quarter next year.

The next regular review of interest rates was not due until October 3. Never before, since the official cash rate regime came in 2 1/2 years ago, has Dr Brash adjusted interest rates between the regular six-weekly reviews.

The timing is even more surprising in that the financial markets were operating normally and the Reserve Bank of Australia had not joined in the latest round of rate cuts (although it is expected to move on October 3).

The markets have not interpreted the move as a sign of panic. Instead it is viewed as the Reserve Bank's recognising the inevitable and fast-forwarding to the interest rate settings which were expected to be in place by Christmas.

In a time of such uncertainty, economists are divided about whether we will see another interest rate cut. It depends on how long and deep the global slowdown turns out to be.

But New Zealand is well placed to weather the storm. Economic indicators such as the balance of payments, inflation, employment and the Government's accounts all point in the right direction.

And yesterday's interest rate cut will help dispel any concerns in the international financial markets that Dr Brash is prone to do too little, too late.