Official Cash Rate

Today, the Governor of the Reserve Bank, Dr Alan Bollard, dropped the official cash rate by ½ of 1 percent to 7.5%. This rate affects how much the banks have to pay to borrow money overnight from the Reserve Bank. If the banks pay less, they can drop mortgage rates for home owners. Already the major banks have announced lower mortgage rates. This is good news for people who are buying a house or for homeowners who have to renew their mortgage.

Every 6 weeks, the Reserve Bank reviews the official cash rate. On July 24th it dropped the rate by only ¼ of a percent and people expected today would be the same so this was a surprise. The Reserve Bank could cut the cash rate again in October and December.

One job of the Reserve Bank is to keep inflation between 1% and 3% per year. There is a slowdown in the New Zealand economy, as well as in the global economy. Businesses have higher costs but lower demand for their products. House prices are dropping and there is a slowdown in the building market. Food prices are up, because of the drought earlier in the year then floods during winter and transport costs, while electricity is up and petrol prices are still high. Lower mortgage payments will help families who are home owners, and lower interest rates will help many businesses.

However, some employees will get wage increases of 5% this year which could push inflation up. Dr Bollard is hoping that inflation will come down.

The Kiwi dollar dropped 1 cent against the American dollar after the announcement today. It’s now around 65 cents American to the New Zealand dollar. This is good for exporters but import costs will go up.

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