The Governor of the Reserve Bank, Graeme Wheeler, today dropped the Official Cash Rate (OCR) by 25 points to 2.25%. This was a surprise move although economists expected it to happen later in the year. Mr Wheeler suggested that the OCR could drop again later this year. The Reserve Bank is New Zealand’s central bank which controls money policy in our country. The Governor tries to keep inflation between 1 to 3%. Low oil prices means inflation is quite low at the moment.
There are a number of reasons for the drop in the OCR. Overseas, the slow growth rate in Europe and China means less demand for our exports. In NZ, the high price of houses in Auckland and the drop in dairy prices are a concern. Just two years ago, milk powder was selling for $8.40 a kg but it has been steadily dropping since then. This week Fonterra announced it could only pay $3.90 a kg. This is a huge change. Many dairy farmers owe more than a million dollars to a bank and will now have great difficulty finding enough money to pay back this debt.
On the positive side, there is strong immigration, tourism and construction work. Although Auckland house prices are still too high, the housing market is starting to slow down.
Home owners who have a floating mortgage may be lucky enough to have a drop in their interest rate. However, investors who like high interest rates on their investment money, will receive less money. Meanwhile, the NZ dollar fell 1.5c against the US dollar. This should help our exporters.
• economist (stress on 2nd syllable) – a person who has studied economics (stress on 3rd syllable) and is qualified to give advice on the economy (stress on 2nd syllable)
• inflation – prices rising faster than wages
• Fonterra – big dairy company
• debt – money owed; note that ‘b’ is silent
• mortgage – money borrowed from a bank to buy a house; note that ‘t’ is silent
• floating mortgage – interest rates ‘float’; if the OCR goes down, interest payments could go down
• investors – some investors put money in the bank, hoping to increase their money through interest