New Zealand Property Investors' Federation

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24-07-2008

Bollard cuts interest rates - but what will the banks do now?

NZHERALD

The Official Cash Rate was this morning cut for the first time in five years but homeowners might have to wait for their mortgage rate to follow suit.

Reserve Bank governor Alan Bollard this morning cut the OCR by 25 basis points, taking it down to 8 per cent, the first of an anticipated series of interest rate cuts.

But, since most banks fund much of their lending on international markets - which have tightened drastically as a result of the global credit crisis - the OCR may have little immediate effect on mortgage holders.

Kiwibank, which has led other markets down with interest rate cuts this year, said today it would not immediately cut rates further as a result of the Reserve Bank's move.

Spokesman Bruce Thompson said the state-owned bank had essentially anticipated the Reserve Bank's move today with the Reserve Bank's move today with its earlier cuts.

Kiwibank has the advantage that it funds purely on the domestic market and with many finance companies failing, investors have been heading to the relative safety of the Government-owned bank.

ANZ National chief economist Cameron Bagrie said the wholesale curve influenced by the Reserve Bank was only one factor that influenced mortgage rates. The other was international volatility, he said.

"The cost of credit has gone up a long way. Because we run a current account deficit, we need to borrow money overseas and that is going to have a direct cost overseas," Bagrie said.

He said retail mortgage rates would be assessed on a week by week basis.

"It's a competitive market. Everybody will be closely watching what competitors do. People will be watching how far wholesale interest rates move and people will also be looking at what is happening around the globe," Mr Bagrie said.

That will be disappointing news for the increasing numbers of "middle New Zealand" families seeking out the services of Family Budgeting Services.

Executive officer Raewyn Fox said families with combined incomes of between $40,000 and $100,000 are now asking for help. Previously budgeting service providers would have dealt with renting families on low incomes but that is now changing.

"People who come to us tend not to come until they are really in strife, they need some reorganising or relief of some kind," Fox said.

She said people are also being realistic and making big decisions such as getting rid of a car, downsizing their house or even selling the house and going into a rental property.

"As well as the mortgage pressure, there's also the food pressure and petrol pressure," Fox said.

Chief Executive of the Manufacturers and Exporters Association John Walley said this morning's cut would provide "much needed relief for exporters" but pointed out that continuing cost pressured remained, which reduced the efficacy of monetary policy controlling inflation.

Recession threat

Most economists had agreed the Reserve Bank was poised to start a new easing cycle, but had said it was too close to call whether Dr Bollard would begin it today or wait until September.

In a statement, Dr Bollard said the rising threat of recession prompted him to make the move today.

"Economic activity is likely to remain weak over the remainder of 2008," he said.

"The ongoing correction in the housing market, together with the very high oil prices, will limit household spending and constrain the extent of recovery," he said.

"However, high export prices and an expansionary fiscal policy are expected to contribute to a gradual pickup in activity through 2009."

Markets

The sharemarket reacted positively to today's rate cut with a 1.2 per cent rise, building on yesterday's 1.8 per cent jump.

The benchmark NZSX-50 index, up 58 points yesterday, rose another 41 points to 3242.4 in the first quarter of an hour's trading today.

UBS New Zealand senior economist Robin Clements said the Reserve Bank's comments inferred that today's cut was more of an attempt to offset a tightening in monetary conditions driven by the rising international cost of funds.

This means the global credit crunch could have led to banks increasing their rates.

Yesterday's announcement of Hanover Finance being in trouble "could have been the final straw" but easing of the interest rates was not far off anyway, he said.

"Furthermore, the RBNZ has signalled the likelihood of further rate cuts (no surprise there), 'provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation'."

In respect of inflation, said Clements, the immediate sign-posts will be developments in the labour market, with data coming out early next month and which "should provide support for the notion that the soft real economy is flowing over to the labour market."

This reduces the risk of inflation pushing wages and prices higher.

"Our view is that the RBNZ will cut 25bp (0.25 per cent) at each opportunity, such that the OCR falls to 6.75 per cent by March next year," he said

If consumer and business confidence is better by then, the 6.75 per cent mark would be the low point of this rates cycle.

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