KEY POINTS:
The scale of today's Official Cash Rate cut caught the market by surprise. Most were expecting a more modest 25 point (0.25pc) cut. Now, some are thinking the Reserve Bank will cut rates by another 50 points when it next looks at it on October 23
Here is a summary of some of the reaction to the cut from different economists and industry groups:
"The New Zealand Manufacturers and Exporters Association (NZMEA) welcomes the 50-point cut but points out that its affect on the exchange rate simply serves to amplify the boom to bust economic cycle that will continue to damage the tradeable sector."
"We saw a 50-point cut as necessary to provide some relief for the economy,but conditions are still getting worse. We need to see more cuts sooner rather than later. Lets just hope that the high street banks don't hold on to the extra margin for too long and we see the cuts delivered to consumers. We don't expect to see extra spending; debt reduction and savings are the new priorities."
John Walley, chief executive of the Manufacturers and Exporters Association.
"Today's announcement regarding the decrease in the Official Cash Rate will be welcomed by the business community who are looking for a kick start in activity after a prolonged period of difficult economic conditions.
"The reduction in interest rate is also good news for homeowners and it will put more money back in the pockets of New Zealanders.
"However, with interest rates about to fall, those who rely on fixed interest investments for income, and who have experienced a significant increase in the day-to-day price of commodities already, may have to tighten their belts further. Now is a good time for those investors to lock in longer terms on fixed interest investments to take advantage of the high rates currently being offered."
Brian Jolliffe, Managing Director of MARAC.
"Expectations were centred on a 25 basis point cut. The surprise was deliberate, engineered to bring mortgage rates down.
The RBNZ stressed that today's action only brings policy easing forward, and the end point remains the same. We expect the OCR to be cut to 6.5 per cent. by March 2009."
...the RBNZ demonstrated concern that monetary conditions will remain too tight, for too long and could hinder potential growth. On the other hand, the RBNZ are also still mindful of the risks to inflation. However the downside risks to growth have tipped the scales.
The RBNZ sees the economy in recession and wants to get the interest rates paid by households and businesses down, and now. To do so it had to surprise the market and the RBNZ delivered.
The RBNZ's willingness to deliver a 50 basis point has upped the ante at future OCR reviews. There is now a heightened chance of another 50 basis point cut should the markets start to expect a repeat performance in October. We expect the OCR to be lowered to 6.50 per cent, but we are now more likely to get there sooner rather than later.
Nick Tuffley, ASB chief economist
"The policy assessment was dovish, with growth concerns weighing. Inflation is of secondary importance, for now. The RBNZ are 'front loading' the easing cycle, and while a welcome response, this is not a risk-free strategy to pursue.
"We remain comfortable calling the cash rate to 7 per cent and then pausing, but this is contingent on the global scene not worsening further, which looks to be the key risk.
The market will now seriously think about 50bps for October, although we remain comfortable calling 25bp."
"Today's decision was all about front-loading the easing cycle. Interest rates are still forecast to get back to roughly the same level flagged in June (6.9 per cent) by the end of 2010, but at a faster rate.
...the RBNZ view that the economy needs assistance right now, and believes that a 50bp cut is appropriate, as they still don't expect this to be fully passed on given the backdrop of a challenging credit environment."
ANZ Bank economists
Today's 0.5 per cent cut in the Official Cash Rate confirms the Auckland Chamber of Commerce's assessment for some time of a domestic and global economy continuing to slow down and weaken.
The half per cent cut in the OCR double what the market was expecting is a welcome fast tracking of an easing previously signalled, said CEO Michael Barnett.
The Chamber agreed with Reserve Bank Governor Alan Bollard's decision to try and accelerate a growth revival and let inflation take care of itself.
Barnett urged the banking sector to quickly pass on the reduced OCR from 8 per cent to 7.5 per cent with lower interest rates to customers.
Michael Barnett, Auckland Chamber of Commerce CEO
"The size of the cut means that reduced home loan rates are imminent. Interest rates are obviously on their way down and this means banks can now pass on some genuine savings to home owners."
"Many clients have put home purchases or re-fixes of rates on hold pending this news, so we should now see increased activity in the market for the remainder of the year. The prospect of further rate cuts this year and the pending tax cuts should also provide some relief from the financial pressures, which have built up this year due to rising costs.
"The reluctance of some buyers to commit to home purchases should ease and help increase the demand for housing, which may help stabilise prices.
Shaun Riley,Mike Pero Mortgages Chief Executive Officer
"The reduction will mean a lower New Zealand dollar and a better environment for exporting.
We've seen a whole series of redundancies in manufacturing over the last few years and in most cases employers have cited the high dollar as a factor in their decision to downsize or close.
The simple fact is that high interest rates mean a high dollar and that often means our export manufacturing being priced out of the global market.
While it is good to see the rate coming down the fact is that it has been too high for too long because the single-lever monetarist model is a dreadful way to regulate inflation.
We would hope that now the OCR is easing off the government takes the opportunity to review the Reserve Bank Act with an eye to providing a more sensible model of inflation control.
Andrew Little,EPMU national secretary
