OCR down 0.5%
March 10th, 2011 at 10:26 am by David FarrarThe Reserve Bank Governor has dropped the official cash rate from 3.0% to 2.5%. Normally OCR movements are 25 basis points only, so a drop of 50 is deemed large.
There are two fiscal costs to the earthquake. One cost is the estimated $15b drop in GDP over the next five years – and the OCR drop is in recognition of this.
The other cost is the actual cost of rebuilding which may be up to $20b. As the construction gets underway, then it will put inflationary pressure on the economy and I suspect we will see interest rates rise rapidly – but not until probably 2012.
Bernard Hickey has a good piece on why the Reserve Bank dropped the OCR, despite inflationary pressures looming.
I tend to think a 0.25% drop would have been adequate, as it sends the signal, but then means a less drastic escalation in future.
However as I have around a $500,000 mortgage which is mainly floating, I at least benefit from the Reserve Bank dropping 0.5% – saves me a couple of thousand dollars.
Tags: Interest Rates
March 10th, 2011 at 10:46 am
“I suspect we will see interest rates rise rapidly- but not until probably 2012″. Hope you are right David, have rather a large loan that comes due later in the year. Be good to fix it in at a much lower rate, the thieves at the bank won’t be happy though.
Vote:March 10th, 2011 at 10:54 am
Reading between th lines, I suspect that the purpose of the drop is purely psychological: to prevent NZ dropping into a quake-induced funk. Once it is clear this hasn’t happened (fingers crossed) monetary policy will revert to more sensible settings. Fair enough: economics is actually more about psychology than anything else after all.
Vote:March 10th, 2011 at 10:57 am
Mortgage only $37K now so it won’t affect me much at all even though I am floating.
Vote:Good if you have a large mortgage though, I hope this helps NZ to recover a bit, we need a bit of inflation to kick start the economy up.
March 10th, 2011 at 11:13 am
The other cost is to virtually everyone in Christchurch who, if they still have a job or business, is facing years of stagnant wages and/or reduced incomes. Some of that will inevitably float through to the rest of the country but any easing of the pressure on the outwards costs is hugely appreciated.
I guess anyone involved in building is excepted to that!
Vote:March 10th, 2011 at 11:34 am
Assuming the banks actually drop their rates to reflect this. They are slower than oil companies in putting their prices down when their raw material gets cheaper.
Vote:March 10th, 2011 at 12:19 pm
The initial signs are good Brian. A number of banks have already dropped their floating rates by 0.5 percentage points on the back of Bollard’s OCR cut.
Vote:March 10th, 2011 at 12:30 pm
Bollard to everyone in Canterbury with savings: screw you!
Vote:March 10th, 2011 at 12:48 pm
NZdoesn’t have any savings didn’t you know.
Vote:March 10th, 2011 at 12:52 pm
This actually shows what a dog the Reserve Bank Act really is.
That Act is not about making NZer’s wealthy but manipulating the money market based on factors the no NZer has any control off.
Its chocked off the building of a successful economy for the last 20 years like any manipulation of any market. It makes the money market game more important than growing wealth and growing NZ businesses.
Vote:March 10th, 2011 at 2:02 pm
Im mortgage free…. yusssssss!
Vote:March 10th, 2011 at 6:14 pm
Farrar points out costs of earthquake:
”
he other cost is the actual cost of rebuilding which may be up to $20b. As the construction gets underway, then it will put inflationary pressure on the economy and I suspect we will see interest rates rise rapidly – but not until probably 2012.
”
Figures as $20 billion only calculate historical values of drainage and sewer and roads.
To exist Christchurch will need flexible drainage pipes and communications .
Then Nat party Government please tell me how to build flexible roads.
Are we worth it.
Christchurch Central business district is less than worthless.
No we are not.
Vote:You can not afford us. Please let Australia currency adopt us as the eighth state.
.
March 10th, 2011 at 6:42 pm
Its very probable that soon we are going to find that its just plain dumb and stupid to re build on geotechnically unusable ground. What are they going to do then?
Vote:March 10th, 2011 at 7:47 pm
Its a fucken disaster for us prudent investors who make a tidy sum as usurers for the imprudent.
Term deposits will return less than the rate of inflation.
Might as well draw it all out and buy Lotto tickets.
A safer bet than any Finance Company.
No use keeping it in the safe the granddaughter might blow it!
Vote:March 10th, 2011 at 8:18 pm
Johnboy,
Vote:I’m almost tempted to say that we have finally found something on which we agree!
March 10th, 2011 at 8:23 pm
As long as it doesn’t impinge too much on the finances of the Khandallah branch of the Teachers Proletariat for the Advancement of Incompetence in Education I suspect you will cope with the drop in the OCR Bill.
Vote:March 10th, 2011 at 8:29 pm
Don’t worry Johnboy, our school’s doing just fine, but thanks for the kind wishes. But it is interesting to see a Reserve Bank so keen to look after the interests of borrowers when apparently everyone is now so keen on turning us all into savers and investors.
Vote:March 10th, 2011 at 8:34 pm
They took their lead from the Peoples PM Bill (not that Bollard is influenced by politicians of course).
I wait with baited breath for Blinglish to announce that subsidising Kiwisaver must cease for the betterment of the Cantabs.
It seems that you and I may be closer than we thought we were?
Vote:March 10th, 2011 at 8:54 pm
It must have been a difficult decision but I’m concerned they have made it for the wrong reasons. At least one analyst made a good case for why they should not have decreased the OCR, especially considering that a great deal of the rebuilding will be financed by reinsurance and NZ / Aust insurers themselves, rather than by borrowing. So it seems to have been an attempt to boost “sentiment” in the wake of deteriorating economic activity, rather than a purely inflationary focused call. This makes the RB’s actions differ quite markedly from those of the ECB and the Bank of England who are both preparing markets for a probable increase any time soon…
Maybe we should get together for a drink some time, while there’s still enough money left in the Raboplus account to pay for it??!!?
Vote:March 10th, 2011 at 10:10 pm
They did it because Bill and John were begging them to do something. Our 5th largest home building company went down yesterday and there is lots more to follow. 91 fuel has hit $2.16 and will go higher when the NZD drops and not many people will be able to afford insurance soon. They are absolutely desperate for something to bail them out of the economic spiral they oversee.
Vote:March 10th, 2011 at 10:20 pm
Our whole plastic economy relies on the people spending more than they earn.
When the government finally tells the people that we are bloody broke and we need to have savings to keep on owning any of our country and the people heed the advice and stop spending shit happens.
Even more shit is going to happen soon.
It’s small, brown, wrinkled, smells bad and it’s called Winston.
Vote:March 10th, 2011 at 10:40 pm
I see Moody’s has downgraded Spain’s credit rating today (European time) by another notch. It estimated the cost of restructuring Spanish banks will be closer to 50 billion Euros, rather than the Spanish government’s own estimate of 20 billion.
Johnboy is right in saying that we must generate more of our own savings but to do that we need two things: less consumption and reasonable returns to make it attractive. Otherwise, who’s going to bother to take the pain of doing without? Very few people seem to understand the dynamics of debt deleveraging. Ouch!!
At least with the Auckland Cup having been run yesterday, we have now seen the end of the 3 year, multi-million dollar deal that the former Minister of Racing – the aforementioned chap – made with Helen to beef up the stakes of four of our major races, including the NZ Derby at $2.2m. When do you think we will next see a horserace in NZ worth that much??
Vote:March 10th, 2011 at 10:42 pm
November 2011 perhaps?
Vote: