11 Dec 2015

Drought could mean further cuts to rates

2:43 pm on 11 December 2015

There could be further cuts to interest rates if severe drought affects major dairying regions, the Reserve Bank has signalled.

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Severe drought could force further cuts to interest rates Photo: 123RF

On Thursday the bank cut the Official Cash Rate to a record-equalling low of 2.5 percent, which should provide some relief to debt-laden farmers by lowering their interest costs.

The bank also indicated that was as low as it expected rates would go.

But El Nino could yet spoil those plans.

The last major drought in the late 1990s knocked three quarters of a percent off national output, the central bank governor Graeme Wheeler said.

Reserve Bank Governor Graeme Wheeler

Reserve Bank Governor Graeme Wheeler Photo: RNZ

Systems and farming had come a long way since, Mr Wheeler said, but the impact and severity of the drought, particularly if it hit the Waikato and Taranaki regions, was being watched closely.

"The risk is how long it goes for and where does it hit," he said.

"If it went through the summer months and into autumn... and it affected the Waikato region and possibly Taranaki, then that could have significant effects.

"We spent a lot of time looking at the '97 El Nino impact, which we thought was around three quarters of a percent of GDP in terms of lost output."

But Mr Wheeler said things were a lot different from 1997.

"I mean you've seen enormous amounts of irrigation put in in Canterbury. And Canterbury is where the biggest increase in the dairy stock has occurred, so if Waikato and other regions got hit, then that could be a factor."

The next review on rates will come in January, he said.

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