KEY POINTS:
Early reaction to this morning's 1.5pc cut in the Official Cash Rate by the Reserve Bank:
ASB economist Nick Tuffley:
"The outsized moved can't be labelled as that surprising, given the run of bad news over January. Trading partner growth has been revised down dramatically (and we are expecting more downward revisions), NZ business confidence collapsed and Fonterra slashed its forecast for the 2009 dairy payout (essentially wiping out another $1 billion from the NZ economy). Indeed, the Reserve Bank pointed to the deterioration in the world economic outlook, export outlook and the terms of trade for its decision today."
"Today's aggressive move pre-empts a lot of the downside risk to the economic outlook. Nonetheless, our economic growth forecasts are still likely to be considerably weaker than the Reserve Bank's (the Reserve Bank sees the recession lasting through to mid-year; we see it lasting all year).
"We think there are more downward revisions to come, particularly around trading partner growth and the 2010 outlook. Further, the Reserve Bank may be optimistic in thinking consumers will not unnecessarily contract spending," said Tuffley.
Tuffley said he expected another 100bp cut to the OCR in March.
"Even though the Reserve Bank has now had the opportunity to factor in a lot of bad news there is still more to come. In our judgement the RBNZ has little to lose by getting the cash rate even lower: high inflation is not going to be an issue, and monetary policy is the swiftest buffer available."
"One thing to keep in mind is that we are getting close to the end point," said Tuffley.
He sees it as likely to be around 2 per cent - lower than the market pricing of 2.5 per cent.
Senior economist at UBS New Zealand, Robin Clements:
Clements said the extent of the decline in global growth prospects and the ongoing uncertainty had played a large part in today's decision' because of 'a more negative outlook for the terms of trade and exports, and tighter credit conditions'.
"Interestingly, the Reserve Bank made the comment that monetary/fiscal stimulus, along with the lower exchange rate, 'will have a positive
impact on growth', 'provided firms and households do not unnecessarily
contract their spending'. In other words, the RBNZ is warning about over-reacting to the downturn, which would then deepen what is currently still a relatively shallow recession."
Clements said the Reserve Bank had "again put the spot-light on financial institutions, with the expectation that they will 'play their part' by 'passing on lower wholesale interest rates to their customers".
On Bollard's words that the Reserve Bank had "plenty of room to move if needed', Clements said he took this mean that it had 350 basis points (3.5 per centage points) of 'room to move' - more than most central banks
globally had - and was prepared to use it, if it had to.
"Barring a rapid turnaround in the data-flow and sentiment in the coming weeks/months, it is difficult to believe that the easing cycle is near an end. Accordingly, we continue to expect 50bp cuts in March and April, which would see the OCR down to 2.5 per cent," said Clements.
Auckland Chamber of Commerce chief executive Michael Barnett:
"The banks need to follow through quickly with interest rate cuts to ensure the benefits flow through to businesses and home owners,quot; he said.
"The cut in interest rates will obviously help businesses and home owners lower their costs, and improve their prospects for surviving the year ahead."
Canterbury Manufacturers' Association chief executive John Walley:
Walley is calling on the Reserve Bank to force commercial banks to pass the OCR cut on, especially since taxpayers have underwritten bank deposits.
"Can I please have taxpayer guarantees for my business? The Reserve Bank needs to flex its regulatory muscles and start shaking the cage in that regards," Walley said.
He said if the banks did pass on the lower interest rate, than the cost of borrowing will drop and combined with the falling New Zealand dollar, margins would improve for exporters.
"If anything is going to get us out of this mess, it's that part of the economy, having beaten it to death for the last five years," Walley said.
He said if the OCR had not been cut, then jobs in manufacturing would have been threatened.
"While the threat level falls, whether it saves jobs has more to do with the rest of the economy then it has got to do with the OCR. It's helpful but of itself it is not enough," Walley said.
He said the monetary policy lever is all the Reserve Bank controls and it was now broken.
"You can't stimulate an economy anymore than with zero interest rates
and so monetary policy is clearly limited at these times," Walley said.
He said without inflation, the Reserve Bank was not needed.
Walley said even when the OCR was increasing as the Reserve Bank was trying to slow inflation, banks were dropping interest rates because they were borrowing cheap money off-shore.
He also said the Government could take a leaf out of Barack Obama's book and show some urgency when it comes to dealing with the financial crisis.
