Interest rates coming down!

At last. For the first time in 5 years, the Reserve Bank has cut the Official Cash Rate. The 25 basis points cut takes it to 8%.

Opinion on this will vary. (Remember the old joke about laying all the economists in the world head to toe? They’d circle the globe 3 times but never come to a conclusion.)

But the move will ease pressure on ordinary working folk, under great stress thanks to global rises in prices of oil and other commodities, and assist the economy as a whole weather the current economic and financial storms.

For too long, in my view, we have taken a faith-based approach to monetary policy. We’ve had below OECD-average inflation, and some of the highest interest rates around. Recently, the “non-tradeable” component of our inflation (i.e., the stuff that we’re responsible for) has dropped well below tradeable inflation.

It’s hard to see this cut, and the ones that I hope will follow in the coming months, proving inflationary. For one thing there are a lot of fixed-rate mortgages coming up for renewal at higher rates. And consumer spending on non-essentials appears to be tanking. So, a good thing. We are in a recession, damn it!

[Update: ASB have announced a .25% drop in their mortgage rates. Yay!! Good for me later in the year, and good for the Labour Party too. For the economy, we’ll have to wait and see.

Matt Nolan a.k.a. The Visible Hand in Economics provides a good summary of the case against a rise, based on inflationary expectations.]

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4 Responses to “Interest rates coming down!”

  1. adamsmith1922 Says:

    JP

    I would like to think that the OCR cut will bring some relief to consumers and SMEs in particular, but I doubt it.

    It may be the case that we will not see a lot of easing as the banks having to raise money off shore are finding it harder to do so, unless I am mistaken.

  2. jafapete Says:

    Yes, Adam, the banks have already factored in a series of interest rate cuts over the next year, are less inclined to indulge their kiwi customers, etc, so you are right about the relief being limited.

    Still, I refinance at the end of the year, so I’m happier about things than I was yesterday!

  3. MacDoctor Says:

    Sorry to burst your bubble, JP, but that was a 0.25% drop, not 2.5% that ASB announced.

    Pardon me if I gloat for a few seconds, because I rent… 🙂

    MacDoc, I meant to type ,25%, but got the point in the wrong place. 2.5% and I would have been out celebrating in the street!

  4. July 2008 official cash rate cut: The long and winding road « The visible hand in economics Says:

    […] (The Hive) (Not PC) (The Standard) (Kiwiblog) (No Minister *) (Colin Espiner) (Show me the money) (Jafapete). I am happy to see so many New Zealand blogs willing to discuss the issue – even though my views […]

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