2.15pm - By SIMON LOUISSON
Reserve Bank Governor Alan Bollard's surprise cut in the Official Cash Rate was generally welcomed today.
The 25 basis point cut to 5.50 per cent, the first since Dr Bollard's appointment in September, was pre-emptive in nature to fend off the economic effects of drought, Sars and a weak global outlook.
Dr Bollard said the bank did not have a more pessimistic view of the economy than previously but such things as potential electricity shortages and the Sars virus had added "downside risks" to the outlook.
"At this stage we do not expect a large enduring economic impact," he added.
Economists had expected the bank to wait until its full monetary and economic conditions review on June 5, but Dr Bollard said there was sufficient evidence of slowdown both domestically and internationally to act now.
"A weak international economy is now being reflected in softer activity in New Zealand's tradable sector."
The New Zealand dollar fell over half a cent against both the Australian and US dollars -- to US55.28c and A89.50c -- in response to the cut.
Ninety-day bank bills dropped almost the full 25 basis points -- to 5.54 per cent while bank bill futures rallied 24 points on very heavy turnover.
Banks are expected to follow with mortgage and business rate cuts as soon as today, or early next week. ASB Bank and Westpac Bank said their pricing committees were meeting today.
The sharemarket spurted nearly 1 per cent ahead with the indicator top 50 index up 18 points to 1996.86. Market leader Telecom rose 11 cents to $4.73 because of its improved relative attraction to bonds, brokers said.
Employers and Manufacturers Association (Northern) chief executive Alasdair Thompson welcomed the cut but labelled it as "cautious" and said it should have been bigger.
Business New Zealand chief executive Simon Carlaw called it a "prudent" move which was timed right.
"With a negative international economic outlook and widespread uncertainty over energy shortages and diminished business confidence in New Zealand, the Reserve Bank was correct to ease the official cash rate."
Council of Trade Unions secretary Paul Goulter said the "relatively small" cut would lower the risk of the economy making a "hard landing".
Dr Bollard noted that he had made the cut despite the domestic economy being relatively robust, especially in the housing sector.
Real Estate Institute figures out yesterday showed the national median house price in March was a record $200,000 -- up 7.5 per cent on a year ago.
Today's move will give that market fresh stimulus.
The overall strength of the New Zealand dollar would help lean against inflation, Dr Bollard said and the change to the Policy Target Agreement made on his appointment in September had allowed him to act now.
The agreement mandated the bank to avoid "unnecessary instability in output, interest rates and the exchange rate".
"Based on this, we have been prepared to adjust interest rates a little faster in response to the unfolding evidence of a slowdown," he said.
The bank foreshadowed rate cuts in January when it said that if the exchange rate appreciated further there could be scope to cut rates.
"In our judgment, these conditions have now been met."
Dr Bollard said the bank was now more confident inflationary pressures would ease, "which is the basis of today's decision".
"This should not be interpreted as the bank now having a more pessimistic view of the New Zealand economy, but rather as a consequence of our earlier expectations being confirmed."
Commercial bank economists expect at least two more rate cuts of similar magnitude later this year. Today's cut is only a surprise in that it brings forward the time-frame and could let Dr Bollard off being criticised for acting too slowly.
UBS Warburg chief economist Robin Clements said he was unsure if the easing was justified with unemployment at a 14-year low and capacity utilisation near historic highs.
"The risks recently in regard to trading partner growth, Sars, drought have all been pointing in this direction, but it is a bit more forward looking than we'd anticipated.
"I still think the basic parameters of what we're going through will be a fairly modest easing cycle."
- additional reporting by REUTERS
RBNZ: March 2003 Monetary Policy Statement
'Pre-emptive' rate cut welcomed
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