KEY POINTS:
In a 'What the hell, why wait?' decision Reserve Bank governor Alan Bollard has cut the official cash rate, for the first time in more than five years.
With two monsters on the rampage, recession and inflation, his money is on the former to deal to the latter.
He is betting, in short, that much as they might want to people will struggle to pass on the higher costs they face to their employers or their customers.
But he expects inflation to get worse before it gets better, rising to 5 per cent in the September quarter (an increase from the 4.7 per cent the bank was forecasting only six weeks ago).
Bollard implicitly acknowledges that the Reserve Bank's official cash rate decisions are only one factor affecting the interest rates borrowers in the mortgage belt or in business face.
"The cost of funds raised abroad by banks has been rising as the international financial situation has deteriorated," he said.
Today's cut would only mitigate the effect of those increases.
New Zealand banks rely on imported savings for about a third of their funding and the credit spread or risk premium they now have to pay is higher than normal and much higher than it was during the housing boom. Borrowers who took out fixed rate loans then will still face higher mortgage bills as they roll off.
The bank expects economic activity to remain weak for the rest of this year and to pick up only gradually next year aided by high export prices, tax cuts and higher Government spending.
He holds out the prospect of further cuts but with two conditions, warnings really, attached - no wage-price spiral and not too fast a drop in the dollar.
