Banks cut home lending rates

11.00 am UPDATED REPORT

Retail banks reacted swiftly to the Reserve Bank's widely anticipated half percentage point interest rate cut this morning, with three banks cutting home lending rates about an hour later.

Reserve Bank Governor Don Brash eased the Official Cash Rate (OCR) by half a percentage point in the bank's quarterly review of monetary conditions, to 4.75 per cent from 5.25 per cent.

The OCR, the benchmark for commercial banks to determine home lending interest rates, is at its lowest level since it was introduced in March 1999 at 4.50 per cent.

WestpactTrust and ASB Bank both cut their floating home mortgage loan rates by 50 points to 6.70 per cent.

WestpacTrust also dropped its one-year fixed rate by 20 points to 5.95 per cent, the bank's lowest in 20 years, and its five-year fixed rate by 46 per cent to 6.99 per cent.

AMP Banking announced a new floating rate of 6.49 per cent.

The rate for 90-day bank bills, from which floating mortgage rates are funded, was at 4.80 per cent after the Reserve Bank's move.


Dr Brash said the rate easing reflected the fact the world economy was "looking kind of gloomy out there", although New Zealand was entering a global slowdown in a pretty good position.

"I'm certainly reflecting serious concern about the synchronised global slowdown, and not to reflect that would be putting one's head in the sand," he told reporters.

Following yesterday's events, the decision of whether to cut by half or a quarter a percentage point was a pretty straightforward one. There was no contemplation of cutting by more than half a percentage point.

Dr Brash said the economy had already slowed "quite sharply" and was likely to continue growing "rather slowly" in the immediate future. That would exert downward pressure on inflation.

He signalled another cut in the OCR at the bank's next review on January 23.

In normal circumstances the domestic economy looked relatively buoyant with unemployment at a 13-year low, the property market well ahead of last year and exporters getting good prices, supported by a low New Zealand dollar.

In such an environment Dr Brash said he might be looking to hike rates.

"But these are clearly not normal circumstances. The international environment seems more threatening than at any time in more than a decade and, if things turn out even worse than we expect, we may well be faced with the need to reduce interest rates still further."

The bank notes financial markets are anticipating the OCR to drop to 4.5 per cent for the first half of next year, which suggests a further quarter percentage point cut will be made in January.

Inflation is forecast to come down to 2 per cent by the end of this year, half the level of a year earlier, but it is then likely to rise again to 2.5 per cent by the March 2002 year.

However, the economy, which in August the Reserve Bank had picked to grow at 3 per cent both next year and in 2003, is seen slowing from that rate next year to just 1.5 per cent by the March 2003 year.

Dr Brash noted that a good deal had changed since the bank's previous Monetary Policy Statement in August. But he said that even before the tragic events of September 11, the world economy was slowing quite rapidly.

"The events of September 11 exacerbated that slowdown by dealing a blow to business and consumer confidence around the world and led us to cut interest rates by half a per cent on September 19."

That world slowdown had already affected the New Zealand economy and would continue to do so.

"Export prices are now falling across a wide front, while nervousness about air travel is having an adverse impact on the growth of tourism. Business confidence has declined markedly, and we are expected investment spending to slow."

Dr Brash said the economy was in good shape to weather a world recession with capacity pressures still evident in some sectors.

"However, the slowdown in growth expected over the coming year should see these pressures abate, with inflation expected to fall back to around the middle of the (0-3 per cent) target band," he said.

Dr Brash said that the world situation was far worse than in the 1997 Asian crisis because it was affecting the United States, Asia and Europe simultaneously with Japan particularly badly affected.

And on balance, the Reserve Bank believed it was more likely economists had underestimated downside risks to the world economy than the reverse.

In these "unusual times" holding interest rates too high could exaggerate the existing confidence shock and amplify the downturn.

The bank also notes that low inflationary expectations had been well embedded. Despite the 30 per cent fall in the exchange rate over recent years, core inflationary expectations had not risen showing a clear shift from patterns of the past.

Monetary policy had now been set to accommodate "quite a bit of additional weakening' in the global environment but Dr Brash said uncertainty at the moment was considerable and it was not inconceivable that the current slowdown could prove short-lived.

The New Zealand dollar was largely unmoved by the rate cut, trading down 8 points at $US42.29 after 10am, but bank bill yields rallied sharply.

- NZPA