The Reserve Bank has surprised much of the market by cutting interest rates, saying that medium term inflation pressures now looked more likely to ease than to build.
The Official Cash Rate, which has a direct bearing on floating and short-term fixed mortgage rates, was cut from 6.50 per cent to 6.25 per cent at this morning's review. However, 12 out of 16 economists polled last week were expecting the rate to remain unchanged, with the ASB Bank saying in a preview released yesterday that "from an inflation point of view, there is little reason to be easing monetary policy yet".
Reserve Bank Governor Don Brash said today's reduction in the OCR had been a finely balanced decision and further cuts were not inevitable, as there were still risks that inflation would turn out to be more persistent than projected in the Bank's latest Monetary Policy Statement.
However, he said that while most inflation measures had been accelerating, recent events suggested that by the time today's monetary policy settings had an effect, inflation pressures would actually be easing.
"For one thing, it now seems likely that headline inflation will retreat from four per cent quite quickly, reducing the risk of a spill-over into wage and price setting behaviour," Brash said.
"For another, and more importantly, the international economy is slowing down faster than we previously thought. That slowdown will in time impact on our strongly performing export sector, and consequently ease inflation pressure."
Brash said that, at this stage, the RB didn't know how severe the international slowdown might be or how long it would last. "If the slowdown turns out to be relatively brief or if New Zealand's export prices hold up despite that slowdown, any substantial easing of monetary policy in New Zealand would be quite inappropriate."
