The Reserve Bank of New Zealand has swung into line with central banks around the world to slash the interest-driving official cash rate (OCR) by an unprecedented 1% yesterday, to 6.5%, potentially offering some relief to mortgage seekers and dampening recessionary effects.
After a year of being held at 8.5%, the rate has been cut a total 1.75% since July, but remains the highest in the developed world.
The news was delivered amid an ongoing rout of sharemarkets around the world yesterday, which may have softened what became a loss of more than 3% on the New Zealand market.
The leading New York index, Dow Jones, tech Nasdaq and broader S&P 500, are all down between 5% and 6%, as investors come to terms with fears of a global recession.
In the United Kingdom and Europe, bourses were down about 4.5% on Wednesday trading, while the Asia Pacific bourses were all down.
Korea, Hong Kong and Singapore were each down more than 5% and Australia's All Ords and S&P 200 were down more than 3%.
New Zealand's SE 50 index slumped again on opening yesterday, initially down more than 1.5%, and continued to slide, to close down, at 3.17%.
Asian bourses resumed trading yesterday and were well down again in early trading.
ABN Amro Craigs broker, Chris Timms, said dropping of the rate "buffered" the New Zealand market to some extent, and had a cut not been announced, the market was likely have declined further, in line with bourses elsewhere.
There was only a light volume of $50 million traded yesterday, but the market was dragged down by Contact Energy, down 4% in value, Fletcher Building, down 1.9%, and Telecom, down 7.4%, Mr Timms said.
Kiwibank straight away cut its variable home loan rate by the full 1%, to 8.7%, after the 9am announcement.
The new rate applies to new customers immediately and in a fortnight for existing customers.
None of the major four banks made any moves yesterday.
However, the opportunity for banks to cut mortgage rates comes at a time when they have to pay more to borrow the funds, because of the global credit crunch, and there is shortage of funds in general.
Mr Timms said floating mortgage rates could fall below fixed rate levels, as has happened in Australia, but banks will shortly begin pruning up to 1% off the interest rates of term deposits.
The pronounced volatility of the New Zealand dollar against the United States greenback recently was amplified prior to yesterday's 9am announcement, having fallen almost US2c to 58.60c overnight on unqualified expectations the rate cut could be greater than 100 basis points (1%).
However, it quickly retraced 1c after the announcement to trade around 59c, and at 5pm was 59.06c.
Bank Governor Dr Alan Bollard hinted that if inflation, announced this week at an 18-year high of 5.1%, should fall below the bank's outer 3% target, there was room to further cut the rate "over the coming months".
Despite a similar but surprise cut by Australia last month, the Reserve Bank here was criticised for not moving sooner outside its six-weekly review schedule and the 1% cut was already factored into financial markets.
ASB chief economist Nick Tuffley said the country's economic outlook had deteriorated on two fronts; a slackening in world growth and demand for exports.
"Governor Alan Bollard acknowledged that funding costs on international markets have increased, which will affect how banks mortgage rates will respond to the OCR cut," he said in a statement.
In an unusual move, Dr Bollard fronted up for media questions when making the announcement, and said "the ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today's decision".
"Economic activity in New Zealand will be further constrained by these international developments. New Zealand can expect to face lower demand for exports and credit is likely to be less readily available.
"In this environment consumers and businesses are likely to be more cautious and curtail spending," Dr Bollard said in a statement.
With weaker short-term growth and sharply lower oil prices Dr Bollard expected annual inflation would return to within the Reserve Bank's target of 1%-3% by mid-2009.
"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," he said.
The Reserve Bank's focus would remain on medium-term inflation, and if the outlook evolves as projected, Dr Bollard expected to lower the rate further.
"However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out," he said.
• Oil prices dropped more than 7% on Wednesday, touching a new 16-month low as rising US fuel inventories added to signs a global economic slowdown has dragged down demand, Reuters reported.
Stocks, currencies, oil and commodities tumbled on Wednesday and governments from Budapest to Buenos Aires resorted to emergency action to rescue their economies from the worst financial crisis in 80 years.
Central bank cash rates
United States 1.5%
Canada 2.25%
England 4.5%
Euro-zone 3.75%
Australia 6%
Japan 0.5%
New Zealand 6.5%
