RBNZ to take rates back to GFC levels
The Reserve Bank of New Zealand is set to become the first major central bank to take its official cash rate back to the historically low level seen during the global financial crisis, as an already weak economy is crippled by the Christchurch earthquake. The RBNZ's monetary policy statement is due on Thursday and expectations are for a 50-basis-point cut in the OCR. Such a cut would bring the rate down to 2.5 per cent, the rate that prevailed from April 2009 to June 2010. Banks have already lowered their fixed-term mortgages rates and deposit rates in anticipation of a 50-basis-point cut. And Prime Minister John Key has gone on record at least twice to say that lower rates would help the economy, although the decision rests with RBNZ Governor Alan Bollard. An OCR cut would be the best thing that could happen to the banks as a fully fledged rate war is imminent because of stagnant credit demand in the economy. Â As expectations of a rate cut grew stronger following the earthquake, banks moved to lower their fixed-term mortgage rates and also got the advantage of cutting deposit rates, thus helping to preserve their margins. The variable mortgage rate is the only rate that has been left untouched, as banks usually prefer to cut this rate when the OCR actually moves. With a rate cut already fully baked into market prices, the focus of the monetary policy statement will be on how the RBNZ see rates moving over the medium term. When it made its last OCR announcement, the RBNZ said it expected rates to increase modestly over the next two years and it was believed the upward move would start in the second half of 2011. The markets will now be looking for hints on whether this will now change to early or mid-2012. Westpac economists have an interesting view. They believe that once rates resume their uptrend they will peak on the tight side of neutral, rather than settling at neutral, which is the RBNZ's aim. The reason for this is because reconstruction activity will now be far greater in 2012 than prior to the Christchurch earthquake.