The Reserve Bank’s “stunning” cut to the official cash rate means it’s a very good time to invest in New Zealand, according to Finance Minister Grant Robertson.
This morning, the Reserve Bank cut the official cash rate (OCR) by 50 basis points to 1 per cent – a historic low.
This is just the fourth time in New Zealand’s history the OCR has been cut by 50 basis points.
The first was after the 9/11 terrorist attack, then during the global financial crisis, and again after the Christchurch earthquake.
Westpac called the decision “stunning” and said it was very surprised that the Reserve Bank would cut the OCR so significantly “in today’s environment”.
But Robertson is not as pessimistic.
In fact, he painted the central bank’s decision as good news for Kiwis.
He said the OCR cut would improve the cost of living for many New Zealanders.
“Their mortgage rates will go down, the baked-in cost of borrowing that is in goods we purchase may well … reduce.
“It also means it’s a very good time to invest in New Zealand.”
WHAT SHOULD WE DO?
There’s not much room left for the Reserve Bank to cut rates if a recession were to hit.
The theory is that reducing the cash rate then lowers the cost of borrowing, which makes it easier for people to take out loans to spend and get the economy moving again.
But the lower the cash rate, the less of an impact reductions in it have on what banks charge.
ASB chief economist Nick Tuffley said, with a record low rate, the Reserve Bank had less ammunition to deploy if things deteriorated.
Other countries in that situation have used quantitative easing, where money is pushed into the economy by central bankers.
But Tuffley said it could be up to the Government to step in if the economy seriously needed saving.
‘Banks busy with leadership changes within NZ, protection and diverting current loan policies towards businesses.
Reducing the cost of fundamental business running unemployment rate on the up in finance industry. While in the process of predicting the next move for self-protection!
IN FULL, Not enough confidence ANYMORE! Influenced by global finance turbulence!
Lets stay in peace for as long as we can until the shaking stops!
What the OCR does
The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a means of influencing the level of economic activity and inflation. An OCR is a fairly conventional tool by international standards. In the past, the Reserve Bank used a variety of tools to influence inflation, including influencing the supply of money and signalling desired monetary conditions to the financial markets. Such mechanisms were more indirect, more difficult to understand, and less conventional.
How the OCR works
Most registered banks hold settlement accounts at the Reserve Bank, which are used to settle obligations with each other at the end of the day. For example, if you write out a cheque or make an EFTPOS payment, the money is paid by your bank to the bank of the recipient. Many hundreds of thousands of such transactions are made every day. The Bank pays interest on settlement account balances, and charges interest on overnight borrowing, at rates related to the OCR. These rates are reviewed from time to time, as is the OCR. The most crucial part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR.