Bollard's barrel is nearly empty

Reserve Bank Governor Alan Bollard cut the official cash rate for the sixth time in eight months yesterday but signalled that there is not much more where that came from.

He has now cut the OCR from 8.25 per cent to 3 per cent. The bank's forecast imply it will go to 2.5 per cent and when he appeared before Parliament's finance and expenditure select committee yesterday he indicated he would take a lot of persuading to go below 2 per cent.

Lower rates hurt depositors. "I am already getting a lot of letters from older people about that," he said.

Another reason is that New Zealand as a small and highly indebted country needs higher rates to compete for funding in offshore markets.

In any case, borrowers have yet to feel the full benefits of what Dr Bollard has done already.

The bank thinks rate cuts already dispensed will cut the average mortgage rate people are paying by another 2 per cent over the next couple of years.

The delay reflects the fact that fixed rate loans became very popular when rates were rising and it takes time for them to roll off on to the lower rates on offer now.

Asked how much of his OCR cuts the banks had passed on to borrowers, he said that before yesterday, he had cut rates by nearly 5 per cent, while floating mortgage rates had fallen by nearly 4 per cent and the two-year fixed rate by nearly 3 per cent.

The Reserve Bank's forecasts are grim reading for businesses chasing the consumer's dollar.

We are barely halfway through a 20 per cent peak-to-trough fall in house prices, the bank says.

It expects consumer spending to fall this year, to be flat next year and stage only a feeble recovery beyond that. By 2012, consumption per capita will be lower than it is now, the bank reckons.

But it expects government spending and a rebound in investment and exports to deliver a fragile recovery, starting in the second half of this year.