NZ Rate Cut October 2008: 100 Basis points

So the OCR is now down to 6.5%. This was in line with market expectations given recent credit market turmoil.

According to the statement “ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today’s decision” – consistent with the view of the market

Although I was unimpressed by this statement:

With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to
3 percent around the middle of 2009

Given that a drop in CPI growth as a result in a fall of tradables does NOT imply that the Reserve Bank is achieving its mandate, they partially made up for it with this:

However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high

Non-tradables is a problem – we have had a recession and they haven’t declined. The Bank does need to ensure that non-tradable inflation goes below 3% before it can be confident about heading into easing territory.

  • Matt,

    Interesting comment from Bollard on domestic inflation. He talked in more detail at the press conference about how the power companies and councils need to get real and join the rest of the world by stopping putting up prices.
    Nice to get some hawkish words, even if they are only words on the day of a 100 bps cut.
    Interesting too that the banks appear not to be passing much on in mortgage rates. Kiwibank is cutting just 20 bps off its 2 year fixed rates.
    cheers
    Bernard

  • “He talked in more detail at the press conference about how the power companies and councils need to get real and join the rest of the world by stopping putting up prices.”

    Councils sure – they don’t face a proper price mechanism. However, telling power companies not to react to market signals smacks of desperation – it isn’t up to companies and workers not to act in there best interest, its up to him to keep inflation down.

    Next thing he’ll be telling workers to keep wage demands low – oww he’s already done that 😉

    “Interesting too that the banks appear not to be passing much on in mortgage rates”

    Indeed. I wouldn’t want to conclude much until the end of the day. Even after that, we’ll give it a week and see what happens. The tightness of credit conditions is an incredibly difficult issue to get your figure on the pulse of at the moment.

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