Official Cash Rate Cut

Once more the governor of the Reserve Bank, Alan Bollard, has cut the official cash rate, but this time by a large amount: 1.5%. This brings the official cash rate now to 5%, the lowest in a long time. This is the rate that banks pay to borrow overnight. (See Sept 11 and Oct 22). The banks are now expected to lower their mortgage rates, maybe to 7.5%. Some banks have already made changes and are offering much cheaper mortgages to home owners. The last two official cash rate changes have been just 0.5% so the drop this time to 1.5% shows that Alan Bollard thinks New Zealand’s economic situation is serious.

It is possible that the New Zealand dollar will again drop against the American dollar but the feeling is that the New Zealand dollar has gone too low, below its fair value. A low New Zealand dollar can be good for exporters trying to sell our products overseas. Of course, they will receive less money for their products but they might get more sales. Both the US and Europe are not in good financial positions and they might not have the money to buy our products. On the other hand, Japan is not affected so badly by the global financial crisis and Japan is one of our main markets.

Early 2009 will see big changes in New Zealand’s economy. There are the promised tax cuts to come, government spending on infrastructure which was also promised, and the government’s promise to help people who lose their jobs because of the financial situation. These things should help to bring back confidence in the economy.

However, those people who have investments will suffer with lower interest rates. Older people who have small savings will now have less money to spend.