Floating mortgage rates fell yesterday and the New Zealand dollar rose in value as markets remained confused about the Reserve Bank's true intentions of future monetary policy.
Reserve Bank governor Graeme Wheeler trimmed the official cash rate by 0.25% to 2.5%, a cut anticipated by most market observers.
In his statement, Mr Wheeler said monetary policy needed to be accommodative to help ensure future average inflation settle near the middle of the 1% to 3% target range.
"We expect to achieve this at current interest rate settings, although the bank will reduce rates if circumstances warrant. We will continue to watch closely the emerging flow of economic data.''
ANZ, Westpac, BNZ and Kiwibank quickly cut their floating mortgage rates in response to the cut by Mr Wheeler.
But the dollar reacted by marching up.
ANZ chief economist Cameron Bagrie said he expected more of the same in coming weeks, given the improvement in the tenor of local data and the fact a Federal Reserve interest rate rise next week was nearly fully priced.
That would potentially become a sticking point, given the trade-weighted index - the basket of currencies of New Zealand's major trading partners - was trading above the level the Reserve Bank was anticipating for the three months ended March next year, he said.
The Reserve Bank's decision to cut rates was against the view of the ANZ, but Mr Bagrie said he could not quibble with the cut.
"In many ways, the move was analogous to the European Central Bank last week - an easing was delivered, but it was of the hawkish variety.''
BNZ senior economist Craig Ebert said in many ways the Monetary Policy Statement was a highly political document, charged with offsetting the criticism of those who believed the Reserve Bank was failing in its objective of getting inflation back to 2%.
The Reserve Bank's forecasts had the cash rate stuck at 2.5% forever but left the door open to a further reduction in the event circumstances warranted, he said.
At the top of the risk list was the possibility export prices dropped below levels at present assumed.
A 6% drop in prices relative to forecast would mean a 0.5% cut in interest rates.
The potential for El Nino to reduce output, and inflation, was also discussed with the policy response being a 0.25% cut.
"It is plausible an El Nino production cut and price declines occur simultaneously so the rate response could be cumulative.''
If either of those things happened, it would take time before the moves became fully embedded in the Reserve Bank's forecasts, Mr Ebert said.
Under the risk scenario, rate cuts would not happen until June of next year.
The chances of a January rate cut were close to zero and March was very low.
In an unusual alliance, the Taxpayers Union and Labour finance spokesman Grant Robertson both called on the Government to come up with fresh ideas to grow the economy, lower unemployment and lift incomes.
Taxpayers Union spokesman Jordan Williams said with the economy cooling off, it was time the Government came up with an economic plan B.
More corporate welfare did not count.
Mr Robertson said the 2.5% OCR matched the low point reached during the global financial crisis and the Canterbury earthquakes.
Finance Minister Bill English indicated last year an increasing OCR reflected the strength of the economy.
"If that is the case, then four cuts to the OCR in the last six months to a record low must reflect a weakening economy.''
The Reserve Bank had done much of the heavy lifting in response to the economic malaise New Zealand found itself in, he said.
With rising unemployment, stagnant incomes and negative economic growth per capita, the central bank had little choice but to cut rates.
Now was the time for National to step up and do its part.
Drifting along could no longer be an option, Mr Robertson said.
AT A GLANCE
• Reserve Bank cuts OCR to 2.5%
• Retail banks cut their floating mortgage rates
• Dollar rises, even though interest rates fall
• Call for the Government to come up with economic plan B
