Jan 09 OCR decision: Cut 150bp to 3.5%

Big cut – bigger than the market expected, bigger than I expected. The deteriorating outlook for world economic activity appears to have been the primary factor driving this reduction in the official cash rate.

Now lets keep an eye on the dollar and on mortgage rates …

  • Down a cent and a half against both CDN and USD so far. Bollard continues his valiant fight against deflation by working to get tradeable inflation up to the respectable levels he’s maintained for nontradeables over the last 6 years.

  • Its hard work keeping inflation outside the target band in the face of collapsing commodity prices – lets see if we’ve got what it takes 😉

  • Jiani

    It looked like a huge cut – Dr Bollard prepared a press conference to announce it this time, which was quite unusual. Last time he had an unscheduled press conference was the very first 100bsp cut last year.

    I was actually expecting a conservative cut so that NZD could have a slight rebound.

  • Hi Jiani,

    I is definitely a very big cut. It makes sense for him to call a press conference in times like this because people need more information – I’m looking forward to the Banks next set of forecasts so I can get a feeling about where they see the TOT going.

    The TOT is very important for our Reserve Bank – when they lifted the OCR strongly it was on the back of a rising TOT, when they have slashed the OCR it has been on the back of a weak outlook for the TOT.

    Ultimately, the Bank is moving rates because of how they feel about the international environment – if our TOT is collapsing a lower exchange rate can help shift some of the burden off exporters and onto the general economy. I think the Bank is happy for the dollar to move further south …

  • Jiani


    I remember the Dec MPS foretasted a export-led recovery in 2009; maybe that explains the emphasis on TOT(?). And that’s why “the Bank is happy for the dollar to move further south”?

  • The primary thing that I take out of it isn’t where the recovery is expected to come from – but the distribution of the burden of what is a temporary “demand side” shock. By lowering the exchange rate the RBNZ is spreading the pain of the decline in demand across the economy – thereby giving exporters an incentive not to cut back on capacity (or taking the credit market view – helping to balance their cash flow for them).

    Exporters complain about the exchange rate, but its movement helps to fill troughs and dampen upswings for the export sector. When our TOT is strong importers get some of the benefit – when it is weak they shoulder some of the burden. However, the risks associated with export activity are then lower …

    The importance of the TOT is even more fundamental than that though. The TOT is our relative price with the rest of the world – an increase in the TOT implies we can get more stuff from the same amount of production, in some sense it is an increase in capacity for the country. As a result, I am concerned about how strongly the Bank reacts to a shift in the TOT – as it can be painted as a supply side shock.

    I would have expected more discussion of “low business confidence” in their statement – some sort of “expectations leading to a pareto inferior equilibrium” style argument. But there was none of that …