Alan Bollard

Wellington, April 30 NZPA - The Reserve Bank cut New Zealand's official cash rate (OCR) by half a percentage point to a record low 2.5 percent and said it expected the rate to remain at or below that level until the latter part of 2010.

Today's 50 basis point cut in the OCR was widely expected by economists and the explicit indication of where rates will be for an extended period is an assurance many had been calling for.

Announcing the decision, Reserve Bank Governor Alan Bollard said the OCR could still move modestly lower in coming quarters.

The Reserve Bank was in line with several other central banks in giving such a specific outlook for the OCR, he said after the announcement.

"The reason is that we're trying to avoid the sort of premature expectations of recovery that we have seen over the last month in some economies," he said.

Such expectations could ultimately prove damaging with an unnecessary and premature increase in exchange rates and interest rates to unnecessarily tightening financial conditions.

The explicit statement in the decision was intended to avoid a repeat of what the Reserve Bank considered to have been quite an unusual set of market circumstances in past few weeks. That was not just a New Zealand issue, but was more international.

People did not understand necessarily how a recovery would take place. They saw a turning in some financial markets globally and assumed that meant economic recovery, but it was more complicated than that, Dr Bollard said.

"The message from the 1930s and more recently is that recovery can be a long and rocky road and they shouldn't jump prematurely into it."

At the start of April, the Reserve Bank had been forced to say longer term interest rates would remain low for a prolonged period, after a rush to refinance home loans at cheap rates caused swap rates to spike.

"We were a little bit scared a month ago that there was a sudden euphoria sweeping through the housing market in a way that might lead people to think happy days were here again, they could plough back in and nothing had changed, and that's not the situation," Dr Bollard said today.

The housing market was behaving pretty much as the Reserve Bank had been forecasting for some time. The Reserve Bank still thought there would be further reductions in house prices on average, although there would always be exceptions to that.

The Reserve Bank expected banks to keep passing on major OCR cuts, but compared to some northern hemisphere countries New Zealand had been able to enjoy much of the OCR reductions coming through on mortgage rate reductions.

"But to the extent that there's still softness there, and that we've got another cut today, we'd expect the banks to be passing that on."

The OCR has now been brought down in haste from 8.25 percent last July as New Zealand entered a lengthy recession and world economies struggle to extricate themselves from some of the worst economic conditions in many decades.

In his official statement today, Dr Bollard said that overall developments since March pointed to lower medium term inflation than previously projected. That was mainly due to weaker global growth, and an unwarranted tightening in financial conditions through both higher long term interest rates and a stronger exchange rate than expected.

"While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced," he said.

The scale of the global financial crisis and domestic adjustments under way were such that it was likely to be some time before economic activity returned to robust and healthy levels.

The New Zealand dollar plunged nearly US1c immediately after the OCR announcement from US57.34c to $US56.46c, remaining around that level an hour later.

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