And the Reserve Bank cuts …

So, the Reserve Bank has just announced that it has cut by … I don’t know, its 7.30am for me so the Bank is yet to announce it. We have discussed this wildly though (here, here, and here) – so it will be good to see what has happened.

Feel free to do your own announcement in the comments (RBNZ site is here), and I will get to putting an update on this by about 9.20am.

Update: They cut by 150bp – I was wrong and everyone else was right 😉 . DG was right when he said Monday’s numbers were very important – the Bank was looking for a big cut but these numbers definitely set the tone for cuts to come. I am nervous about the size of the contraction in consumption that is being discussed – low petrol prices will get some people spending. But as long as no-one will lend to people I suppose it doesn’t matter 😉

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  • Gareth

    The Yahoo Xtra page has the headline “Interest rate slashed TO 1.5%”
    Ummmmmm, you may want to check that Yahoo…

  • A 500bp rate cut would have been intense 😛

  • Kimble

    “I called the Aus rate cut and swept the pool at work. My pick is 1.5 for NZ.”

    tick

  • “tick”

    Congrats – was there a pool for that as well?

  • Kimble

    no pool

    it was a call made by feel

    with sentiment heading south i thought that the respective RBs would try to surprise everyone to shake a bit of “sense” into them

    what would they see as the risks of dropping the OCR too far?

  • They obviously don’t think the risks are too intense – then again thats what central banks were saying over 2003 …

  • MikeG

    Will this really have a major impact on our spending?

    There may be a number of mortgage holders who have held back fixing their terms waiting for this, but a lot of us are locked in to higher rates.

    New entrants to the property market? You now need a bigger deposit, so not a lot of movement here.

    Credit cards rates are very slow to move down, and many have already maxed out their cards.

    I know I haven’t covered everything here – I’m interested to see other angles on this one.

  • I think one thing to keep in mind is that the purpose of the OCR isn’t just to move mortgage rates and household spending. A change in the OCR also shifts the rate that businesses payout for loans – this transmission mechanism is a bit faster, and probably a bit more important in the credit constrained environment we are in.

    Even if we were thinking of household spending – I wouldn’t underestimate the impact of lower expected future interest rates. If people think they will be paying less in the future that is a real income boost.

  • PinkGina

    MikeG,

    Will the effort finally get the economy moving again? Frankly, I doubt it.

    Lower mortgage rates can help people buy housing, but only if they feel secure enough in their jobs, and confident enough in their financial future to take the plunge. Given that consumers are struggling with debt, especially housing debt, fearful of layoffs, and waiting for housing prices to hit bottom, it’s unlikely that they’ll react to rate cut with a spending spree.

    Consumers don’t react to debt like companies, though the past government behaved like they do.

    Giving companies better access to credit allows them to meet payrolls while they adjust their production and expenses in response to tighter economic condition. But families who can’t pay their bills can’t lay off a spouse and kids.

    For them, debt grows from bad to worse as interest charges accumulate.

    Sorry to be so negative

  • “Giving companies better access to credit allows them to meet payrolls while they adjust their production and expenses in response to tighter economic condition. But families who can’t pay their bills can’t lay off a spouse and kids.

    For them, debt grows from bad to worse as interest charges accumulate.”

    They can’t “lay off” family members – but they can spend less or more. People don’t “need” to accumulate debt – it is possible to live (albeit not particularly happily) on a relatively sketchy income. If people accumulate debt, they must believe that things will change and they will be able to pay it back – otherwise people would stop giving them credit.

    The fact is that lower fuel prices and lower interest rates will increase households disposable income – income that they can spend or save (note that saving and paying back debt are similar things here).

    To “get the economy moving again” we want them to spend, supposedly. Well, they probably won’t be too keen on that when they don’t know if they’ll have there jobs in a years time – as a result anyone that benefits from lower interest rates will probably pay down debt/save just like you said here:

    “Given that consumers are struggling with debt, especially housing debt, fearful of layoffs, and waiting for housing prices to hit bottom, it’s unlikely that they’ll react to rate cut with a spending spree”

    However, we can’t rule out the possibility that people will start spending – there has been a lot of stimulus going on around the world, if the credit channels clear then things will be … interesting

  • MikeG

    PG – no, I don’t think that you are being negative, just realistic.

    Companies at the moment seem to be in cost avoidance or even cost reduction mode at the moment. This is not being driven by the cost of money, it’s about the revenue (or lack of) coming through the door.

  • “Companies at the moment seem to be in cost avoidance or even cost reduction mode at the moment. This is not being driven by the cost of money, it’s about the revenue (or lack of) coming through the door.”

    The cost and availability of credit still important for a lot of firms – as when revenue is low it is their only way of ensuring they have the cash flow to keep functioning.

    Firms with strong cashflow can accept that the next 18 months could be a tough time – but firms that are credit constrained aren’t going to make it through.

    The Bank is so determined to cut rates because it knows this will free up credit in business lending – as the OCR has a rapid impact on the cost of short-term credit for businesses. Even if households are going to stay in a malaise this channel can help the economy by prevent as many bankruptcies.

    Also note – it isn’t all about driving demand. A few quarters ago everyone was complaining that saving rates were too low – we can’t spend and save at the same time.

    If growth has been based on borrowing and accumulating debt, then now is probably the time we have to pay it back. If that is the case then we should just get on with it.

  • MikeG

    “If growth has been based on borrowing and accumulating debt, then now is probably the time we have to pay it back. If that is the case then we should just get on with it.”

    Agreed – all I have been trying to say is that an interest rate cut is not the magic bullet that the Govt and others are looking for.

  • “Agreed – all I have been trying to say is that an interest rate cut is not the magic bullet that the Govt and others are looking for.”

    Ahhh ok, that’s cool – we all definitely agree on that 🙂

    Ultimately, I’m not sure that there is any silver bullet – I think there is more risk that the government will shoot itself in the foot 😛

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