VZCZCXRO8059
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB RUEHRN
DE RUEHWL #0404/01 3390402
ZNR UUUUU ZZH
R 040402Z DEC 08
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5563
INFO RUEHNZ/AMCONSUL AUCKLAND 1805
RUEHBY/AMEMBASSY CANBERRA 5340
RUEHDN/AMCONSUL SYDNEY 0771
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHSS/OECD POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC 0269
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 02 WELLINGTON 000404 
 
SIPDIS 
 
STATE FOR EAP/ANP, EAP/EP AND EEB, STATE PASS TO USTR, PACOM FOR 
J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN APEC PGOV PREL NZ
SUBJECT: NEW ZEALAND SLASHES KEY INTEREST RATE 
 
Ref: Wellington 357 
 
WELLINGTON 00000404  001.2 OF 002 
 
 
¶1. (U) Summary:  On December 4, New Zealand's Reserve Bank (RBNZ) 
lowered the official interest rate from 6.5 percent to 5 percent, 
paralleling a move by Australia earlier in the week.  The 1.5 
percent reduction brings the rate to its lowest level for the past 
five years marking a 3.25 percent cumulative reduction since July 
¶2008.  Although the annual inflation rate hit 5.1 percent in 
September, the RBNZ expects year-on-year inflation to fall back to 
within the target band of 1 to 3 percent by mid-2009.  While 
generally satisfied with the Bank's action today, the business 
community remains cautious noting that the benefits of the rate 
reduction will not be immediately felt in certain key sectors like 
the real estate market.  Some are predicting the OCR to bottom out 
at 3.25 percent around the middle of next year. End Summary. 
 
RBNZ slashes Official Interest Rate 
----------------------------------- 
 
¶2. (U)  On December 4, New Zealand's Reserve Bank (RBNZ) lowered the 
official interest rate (Official Cash Rate - OCR) from 6.5 percent 
to 5 percent.  The 1.5 percent reduction, the largest since the OCR 
was established in 1999, brings New Zealand's OCR to its lowest 
level in the past five years.  This leaves the OCR close to the 
Australian rate of 4.25 percent, a crucial fact for New Zealand 
businesses operating in these two closely linked economies.  Reserve 
Bank Governor, Dr. Alan Bollard said ongoing financial market 
turmoil and a marked deterioration in the outlook for global growth 
played a significant role in today's decision.  He noted that 
economic activity with New Zealand's trading partners is expected to 
contract or grow slowly over the next few quarters which in turn has 
caused economic activity within New Zealand to be constrained more 
than anticipated since the last rate cut in October (see Reftel). 
 
¶3. (U)  RBNZ's action today marks a 3.25 percent cumulative 
reduction in the OCR since July 2008 with the Bank hoping its 
expansionary monetary policy, together with the depreciation in the 
Kiwi dollar (trading today at US 0.53c down from a high of US 0.80c) 
will provide the needed stimulus for domestic demand and create the 
conditions for a rebound in growth as global conditions improve. 
(Note:  The newly elected National led government will open the next 
Parliament on December 8 and is expected to announce the details of 
its fiscal stimulus package which is expected to include additional 
tax cuts meant to complement the actions taken today by the RBNZ. 
End Note.). 
 
¶4. (U)  Although the annual inflation rate hit 5.1 percent in the 
September '08 quarter, due largely to high gas, utility rates and 
food prices, Dr. Bollard expects year-on-year inflation to fall back 
to within the Bank's target band of 1 to 3 percent by mid-2009. 
Bollard said, "...(because) growth had been weaker than projected in 
October, inflationary pressure has subsided and GDP is now projected 
to trough at negative 0.2 percent in the middle of 2009 then 
expected to rise to 1.3 percent in 2010."  Meanwhile, unemployment 
is expected to peak at 6 percent by the end of 2009), marking a 
dramatic rise from a low of 3.3 percent in 2007 although expected to 
be lower than during previous downturns (for example 10.4 percent in 
1992). 
 
Not Enough for Business Community 
--------------------------------- 
 
¶5. (U)  A variety of commentators from the business community have 
begun to react to today's record cut in the OCR.  JPMorgan economist 
Helen Kevans is forecasting inflation to fall below the Reserve 
Bank's target range of 1-3 percent before the end of next year, 
which points to the need for still more assertive stimulus.  "GDP 
will decline for 'at least' another three quarters says Ms Kevans, 
before rebounding from just 0.3 percent in 2009 to 2.8 percent in 
¶2010.  JPMorgan expects the OCR to bottom out at 3.25 percent around 
the middle of next year. 
 
¶6. (U)  Bayleys' (large commercial real estate firm) managing 
director, Mike Bayley, says it could be some time before the full 
effects of the decrease flow through to the property sector, because 
more than 80% of New Zealand home mortgages are on fixed terms. 
"Interest repayment levels are just one consideration in the 
decision-making process involved with buying residential property - 
alongside such other factors as genera economic confidence, 
household debt levels, business forecasts and job security," says Mr 
Bayley.  "Lowering the OCR is certainly the first step in redressing 
 
WELLINGTON 00000404  002.2 OF 002 
 
 
what has been a declining property market in both sales volume and 
prices throughout 2008, however these other factors, along with 
raising immigration levels, need to be stabilized before we will see 
any major correction in property prices." 
 
Expect More Cuts 
---------------- 
 
¶7. (U)  The RBNZ is leaving the door open to further reduction in 
the OCR.  The Bank's Monetary Policy Statement (MPS) predicts that 
"further movements in the OCR will be assessed against emerging 
developments in the global and domestic economies and the responses 
to policy changes already in place." 
 
MCCORMICK