New Zealand's official interest rate has been cut to 3 per cent from 3.5 per cent, and Reserve Bank Governor Alan Bollard has warned that the timing and extent of global recovery remain "highly uncertain".
Today's cut of 50 basis points in the official cash rate (OCR) takes the overall reduction to 525 basis points in little more than six months as the global economy deteriorated rapidly.
But Bollard indicated that the days of big cuts to the OCR are now over.
"As economic activity troughs, we expect the rapid easing of monetary policy to slow," he said today.
"Any future cuts will be much smaller than observed recently. We do not expect to see in New Zealand the near-zero policy rates of some countries. New Zealand needs to retain competitiveness in the international capital markets.
"We will assess the need for further cuts in the OCR against emerging developments in the global and domestic economies and the responses to policy changes already in place," Bollard said.
While monetary and fiscal policy responses in many countries to the rapid deterioration in the world economy had been substantial, the Reserve Bank expected the adverse economic forces generated by the crisis to be dominant throughout 2009.
In this country export revenues were down, business sentiment was weak, and investment and employment sharply curtailed.
Further house price falls and increased precautionary saving by households were driving a weakness in spending, and inflation pressure was abating rapidly, Bollard said.
Further falls in the lending rates faced by households and businesses were in the pipeline.
"While credit growth is easing in line with the weak economy, we expect financial institutions to continue lending on sound business propositions, to support the recovery."
The New Zealand economy would be supported by the substantial cuts in interest rates, the large amount of government stimulus, and the sizeable exchange rate depreciation, said Bollard.
The Reserve Bank expected to see activity troughing in the middle of this year and then gradually picking up after that.
"However, the scale of the global financial crisis is such that there is great uncertainty about future economic developments and there is a risk that the recovery may occur later and be more protracted than we anticipate."
ASB economist Jane Turner said the cut "slightly disappointed the market" and was less than the ASB prediction of a 100 point cut.
The Reserve Bank was now sending a strong signal that it did not want to cut the OCR by much more, said Turner.
"The key was in the last paragraph of the statement, the RBNZ again emphasized future cuts will be significantly smaller and "We do not expect to see in New Zealand the near-zero policy rates of some countries. New Zealand needs to retain competitiveness in the international capital markets," she said.
ASB economists now expected the Reserve Bank to finish off this "easing cycle" at 2.5 per cent, with 25 basis point cuts in April and June.
The Reserve Bank's medium term growth forecasts remained "very optimistic" said Turner, with the economy exiting the recession by mid 2009.
"We see this growth outlook as optimistic given the nature of the credit crisis and the expected downturn in trading partner demand. The RBNZ is also placing a lot of weight on the amount of fiscal and monetary stimulus in the pipeline."
UBS NZ economist Robin Clements said the 50 point cut matched the majority of economist's expectations, including UBS, although there were a few looking for a 100 point move and the market was pricing in a move more like 75 points.
"The mere fact that the Reserve Bank was prepared to disappoint the market (albeit only slightly) suggests that the Bank believes it is getting close to where it wants the OCR to be."
The policy assessment made it clear that global developments were likely to 'remain dominant throughout 2009' and that, as a result, the outlook is still 'highly uncertain'.
Encouragingly, said Clements, the bank saw 'activity troughing in the middle of this year and then gradually picking up thereafter' and that 'Inflation pressure is abating rapidly'.
UBS was expecting another 50 point cut next month, "largely on the basis that if it is deemed to be necessary to cut rates at all, it will likely require 50 basis points to make a difference i.e. better sooner rather than later."
Goldman Sachs JBWere economist Shamubeel Eaqub said the cut was widely expected, and Bollard's comments indicated further cuts towards 2 per cent or 2.5 per cent.
"The tone of the media release was subdued, but little changed from January. While the RBNZ reiterated significant stimulus from monetary conditions and fiscal policy, clearly there are concerns around the hitherto inability to stabilise the economy, let alone reflate it."
The ability to cut rates further was diminishing, said Eaqub, partly because at these low levels the marginal benefit of additional cuts was likely small.
Significant easing of short term interest rates had already been delivered by the Reserve Bank, but the "pass through to consumers and businesses has been damped by usual lags and difficult financial conditions in global markets."
With practically no influence on the global markets, - which had inflated borrowing costs, the Reserve Bank may need to consider alternative options, said Eaqub.
In its latest Monetary Policy Statement (MPS), published today, the Reserve Bank said that it was now expecting a deeper and more prolonged recession than at the time of its most recent previous statement in December.
It estimated the New Zealand economy was in its most prolonged recession since the 1970s, although so far the current recession had been shallower than many other recessions.
Assuming gross domestic policy contracted in the December quarter, it would be the first time GDP had declined for four consecutive quarters since 1990.
Data available suggested the decline in economic activity had accelerated in the December quarter.
"Construction activity is likely to have slumped, in line with the steep falls in building consents over the second half of last year," the MPS said.
"Indicators for manufacturing activity have also fallen sharply over the period, suggesting a further substantial contraction."
Marked deterioration in global growth had flowed through to a continued sharp decline in global commodity prices, the MPS said.
In particular, dairy prices had fallen to such an extent that they had reversed the gains of 2007 and, partly reflecting export subsidies announced by the European Union, the Reserve bank expected further declines in dairy prices.
The outlook for weaker meat prices was the other key driver behind the Reserve Bank's downward revision to export commodity prices.
"In real terms, export commodity prices are projected to fall to a historically low level before recovering to around average levels," the MPS said.
Despite the lower NZ dollar the Reserve Bank expected export volumes to continue to decline sharply in 2009 given weaker global demand.
Evidence of accumulated stockpiles suggested weak demand would be persistent, particularly for manufactured and possibly forestry exports. Dairy export volumes declined sharply in 2008, and the Reserve Bank expected that to persist in the near term.
The MPS forecast the unemployment rate to peak at 6.8 per cent early in 2010, well below that of the early 1990s, largely reflecting the fact New Zealand entered the current recession with few unemployed people.
The New Zealand dollar, which firmed in trading ahead of the OCR announcement, rose to US51.17c within 15 minutes - compared with US50.58c at 8am.
* Alan Bollard was expected by many to cut the OCR by at least 50 basis points to 3 per cent today.
* He is headed to 2 or 2.5 per cent by mid-year.
* Last month he cut by 150 basis points
Interest Rates around the world:
European Central Bank - 1.5 per cent
Bank of England - 0.5 per cent
Australia - 3.25 per cent
US Federal Reserve - 0-0.25pc
Japan 0.1 per cent
NZPA/HERALD ONLINE
Interest rates cut to record low 3pc, no more big cuts, says Bollard
Graphic / Christoph Lukasser
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