KEY POINTS:
The Reserve Bank will lower the Official Cash Rate (OCR) this Thursday, the only question is whether the cut will be big or very, very big.
Some pundits have predicted a massive 1.5 per cent drop (or 150 basis points in the more easily dividable jargon of finance) this week, which will bring the OCR down to 5 per cent.
That should not be the end of the matter. The ultimate short to medium-term destination for New Zealand's OCR is expected to be even lower - 4, 2 or 1 per cent, take a guess.
Each rate cut will be trumpeted as positive news for indebted homeowners, which it is. But it's also a sign the Reserve Bank is deeply worried about the state of the economy.
And for those on the other side of the equation - investors - the plummeting OCR, which will quickly be reflected in bank cash rates, will start to hurt.
Cash has been virtually the only investment New Zealanders have been willing to touch in recent times. Managed funds - with the exception of cash PIEs and KiwiSaver - had been going backwards, even before the latest crisis.
Even within the managed funds sector the allocation to cash has been going up. According to the latest Reserve Bank figures, at the end of this September about $4.8 billion of managed fund investments was in cash compared to $6.7 billion in equities and unit trusts. In December 2003, the ratio was $2 billion in cash and $7.5 billion in equities.
For financial advisers such risk aversion presents another problem. You don't need much advice to invest in cash (however, the arrival of cash PIEs - see Guardian Trust CashPlus - muddies that statement a little).
So how low will the OCR have to go before investors start putting their heads above the cash parapets? At a recent roundtable event we held for ASSET magazine the general consensus was that investors would hang on for a while yet.
As one adviser said: "... when the cash rate is 2 per cent or 3 per cent people might actually have to start thinking about doing something else. But, until then, I think they will just chase the rates down."
David Chaplin
