VZCZCXRO4662
RR RUEHAG RUEHCHI RUEHDF RUEHFK RUEHHM RUEHIK RUEHKSO RUEHLZ RUEHNAG
RUEHPB RUEHRN RUEHROV
DE RUEHWL #0230 2060207
ZNR UUUUU ZZH
R 240207Z JUL 08
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5337
INFO RUEHNZ/AMCONSUL AUCKLAND 1708
RUEHBY/AMEMBASSY CANBERRA 5220
RUEHDN/AMCONSUL SYDNEY 0699
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHSS/OECD POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC 0242
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS WELLINGTON 000230 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP, EB, INR, STATE PASS TO USTR, PACOM FOR 
J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PGOV PREL NZ
SUBJECT: RESERVE BANK OF NEW ZEALAND SEES RECESSION AS A MORE 
IMMEDIATE THREAT TO NEW ZEALND ECONOMY THAN INFLATION. 
 
REF: WELLINGTON 225 
 
¶1.  The Reserve Bank of New Zealand (RBNZ) announced today that it 
is cutting the Official Cash Rate (OCR) by 25 basis points.  Fearing 
that recession pressures pose a greater threat than inflation to the 
New Zealand economy in the near term, the RBNZ Governor Alan Bollard 
decided to reduce the OCR rate by 25 basis points to the new rate of 
8 percent.  This is the first time since 2003 that the RBNZ has 
reduced the rate.  While the majority of local economist were 
predicting that Bollard would first wait to see the wage/price data 
in August and then announce the change in September, Bollard said, 
"more unpleasant international news has emerged sine June and there 
is a risk that the domestic economy will slow further" (see reftel). 
 He predicted that the annual inflation rate (CPI) would peak at 
around 5 percent in September then return to a level within the 
target inflation band (1 to 3 percent) in the medium term.  RBNZ 
expects economic activity to remain weak for the rest of this year 
and will pick up only gradually next year aided by high export 
prices, tax cuts and higher government spending.  In the meantime, 
the RBNZ will keep a close eye on pressure on wage/price demands and 
the rate of decline in the value of the Kiwi dollar in calculating 
further adjustments to the OCR. 
 
Is the Rate Change a Mandate Change? 
------------------------------------ 
 
¶2.  (SBU) The decision today by the RBNZ signals a move away from 
its original legislated mandate to set the OCR to restrain inflation 
between a narrow range of 1 to 3 percent.  Bollard has essentially 
exceeded the Reserve Bank's legal mandate by this decision.  The law 
requires the Bank to focus on one responsibility only:  keeping the 
inflation rate in a band between 1 and 3 percent.  Analysts here 
have bemoaned in recent months that the Bank does not have the 
flexibility to consider the broader impact of interest rates on the 
economy and labor market, as the Federal Reserve in the U.S. does. 
It appears that Bollard has exceeded his mandate, covering his 
tracks by predicting that inflation will fall later this year 
despite the Bank reducing the OCR now. 
 
¶3.  Fearing a looming recession the Associate Finance Minister 
Trevor Mallard signaled earlier this month that the government might 
be considering a possible break with the Bank's 20 year-old legal 
mandate by proposing a shift away from interest rates as the sole 
weapon against inflation.  National Party finance spokesman Bill 
English reiterated that his party continues to back the current 
framework; saying softening the inflation target would ultimately 
lead to even higher interest rates in the long run.  In June English 
said that, if National won the election, it would not rewrite the 
policy target agreements. 
 
¶4.  Foreign Minister Winston Peters argued earlier this month the 
RBNZ law might provide some unexpected flexibility in the Bank's 
mandate by highlighting a section in the Reserve Bank's statement of 
intent that said the Bank aimed to deepen its understanding of 
"options for alternative instruments".  Mr. Peters said he was 
encouraged by the Bank's statement, but feared 95,000 jobs would be 
lost unless RBNZ acted soon.  "We advocate a rewrite of the act to 
enable the governor to take into account the balance of payments, 
exports, GDP growth and full employment when setting the official 
cash rate."  The Finance and Expenditure committee has been 
investigating options and is expected to report back to Parliament 
in September but is considered unlikely to reach a consensus on 
possible immediate changes.  Meanwhile today's decision by the RBNZ 
may signal a de facto change. 
 
MCCORMICK