10 Mar 2011

Interest rates slashed as quake factor kicks in

9:50 pm on 10 March 2011

The major trading banks have cut their floating mortgage rates in response to the Reserve Bank's cut of half a percent in the Official Cash Rate.

The central bank cut the benchmark interest rate from 3% to 2.5% on Thursday morning.

The banks have, by and large, passed on the cut to their customers: the median for their floating, six-month and one-year mortgage rates is now below 6%.

The cuts follow reductions in fixed mortgage rates by all of the banks last week on the expectation that the Reserve Bank would cut its cash rate forecasts.

Reserve Bank governor Alan Bollard says the Christchurch earthquake on 22 February has knocked the country's confidence and he is cutting the rate now to guard against the risk of the quake's economic impact becoming "especially severe".

The 6.3-magnitude quake devastated much of the central business district.

Dr Bollard says the cut is insurance against the effects of reduced household and business spending and lost production from the quake on an already weak economy.

Firms' sales had started to pick up, he says, boosting plans to employ and invest more, but the quake may put that at risk.

Dr Bollard says he expects the economy will be quite weak through the first half of this year before being boosted by the reconstruction of Christchurch.

The governor says business confidence was on the up before the quake and a cut in the cash rate should help restore confidence - but he warns that the rates could be raised again next year.

Impact on tourism

Dr Bollard expects tourism visitor numbers to be dented for some time as a result of February's quake. Christchurch airport accounts for 17% of passenger movements and he expects many tourists may now cancel trips.

The governor believes tourism will pick up from September with the arrival of visitors for the Rugby World Cup.

However, he says high debt in Western countries, along with the effects of the quake, will act as a drag on tourism numbers this year.

The head of the Canterbury Employers Chamber of Commerce, Peter Townsend, says the cut in the Official Cash Rate (OCR) is welcome - but it will by no means be the salvation of businesses in the quake-hit region.

Mr Townsend told Checkpoint the businesses in affected by the quake are in survival mode and are looking at how they can operate from week to week.

"I suspect a change in the OCR is not at the top of their agenda at this stage."

No mention of inflation

Radio New Zealand's business editor says it is striking that inflation is nowhere mentioned in the bank's statement announcing the cut and it really is all about the effect on growth.

At 4% currently, inflation is already exceeding the bank's target of 1% to 3% over the medium term, and food and fuel prices are threatening to push it higher.

The New Zealand dollar fell after the announcement on Thursday, dropping about half a cent to US73.4 cents before recovering about half of that.

The Christchurch earthquake is initially estimated to cost up to $15 billion and the Reserve Bank is forecasting the economy may stall, if not tip into recession.

Warning of early reversal

The head of market research at BNZ, Stephen Toplis, says the central bank's move should be considered an emergency cut.

Mr Toplis says rising food, oil and raw material prices are building inflationary pressures and the cut may need to be reversed quickly. He says rate increases may be needed as early as the end of this year.

The Reserve Bank will next review the Official Cash Rate on 28 April.