Reserve Bank cuts Official Cash Rate

9.10am

Reserve Bank Governor Alan Bollard today announced he was cutting the Official Cash Rate (OCR) by a quarter of a percentage point to 5.0 per cent, the third interest rate cut this year.

Economists had universally forecast the cut which will be a fresh fillip to home owners and businesses.

The bank said further cuts may be needed if the export sector continued to soften although downside risks in the economy seemed to be abating.

The cut takes the OCR to its lowest level since March 2002.

Dr Bollard said in a statement accompanying the announcement, the Reserve Bank noted in June there might be scope for a further "modest reduction provided the evidence continued to point to reduced medium term inflation pressures".

"On balance, a further reduction seems appropriate today," he said.

Although June quarter Consumers Price Index data indicated inflation was currently running at low levels, Dr Bollard said some of that was due to temporary factors like severe acute respiratory syndrome (Sars) "and will not necessarily be sustained".

"Monetary policy has to contend with the offsetting effects of relatively robust domestic activity and inflation and the weaker activity and inflation being experienced within the tradable sector.

"We will pay close attention to the net effect of these forces in deciding whether there will be room for a further OCR cut in the September Monetary Policy Statement," Dr Bollard said.

Dr Bollard said although the international economy had shown some brighter signs recently, it remained fragile, and further "significant" softening of export activity would likely result in further cuts.

This may hearten exporters, many of whom were hoping for a 50 basis cut today

Dr Bollard said evidence continued point to slowing economic activity and inflation in some parts of the economy as the bank had been forecasting, most notably in the export sector, now being "significantly affected by the rise in the exchange rate over the past 18 months".

Although the exchange rate has eased in recent weeks, Dr Bollard said it remained volatile and there was still potential for it to appreciate in the months ahead.

Some of the downside risks identified in June had abated such as Sars and the electricity shortage, but activity in a number of domestic sectors such as housing and construction remained robust, Dr Bollard said.

Today's cut is likely to further fuel the already torrid housing market, but Dr Bollard said the bank noted that inflation in that sector was already quite strong and, "some investors have unrealistic expectations about this".

- NZPA