The Reserve Bank has dropped the Official Cash Rate from 8.25% to 8%. Inflation is well outside the Bank’s 1-3% target range but there appears to be a recognition that there’s no point strangling our economy with high interest rates when that can’t bring down international oil and food prices.
Don’t expect mortgage rates to instantly drop a quarter of a percent though. The banks had already priced in a 50% chance of a rate cut and the still unwinding credit crunch means banks have to pay a premium to get credit from abroad at present (and they can’t get enough domestically to meet demand). Not to mention that 80% of mortgages are on fixed interest terms.
These same factors worked against the Reserve Bank’s effort to slow the economy 2-3 years ago. International credit liquidity (there was lots of cheap credit back then) and fixed mortgages buffered the economy from the rising OCR and, now, they will dampen the stimulatory effect of a lower OCR.
Critics of the Reserve Bank argue it was too slow to raise interest rates and head off the housing bubble and that it has been too slow in easing now, pushing the economy into recession. Underlying all this there is a need for a serious examination of the timeliness of monetary policy and whether its myopic focus on inflation is right for New Zealand.