New Zealand’s Reserve Bank has reduced its key interest rate – the official cash rate (OCR) – from 6.5 % to 5.00 % this morning.

Since July, the bank has taken 3.25 % from its headline rate.

Reserve Bank Governor Alan Bollard commented, “ongoing financial market turmoil and the marked deterioration in the outlook for global growth have played a large role in shaping today’s decision. Activity in most of our trading partners is now expected to contract or grow only very slowly over the next few quarters.”

The Kiwibank was the first high street bank to respond to the rate cut. The bank is now offering a one-year fixed rate of 6.49 % p.a. and a variable rate of 7.45 %.

Federated Farmers economic spokesman, Philip York, said, “Dr Bollard deserves high praise for delivering a record cut in the OCR. The Reserve Bank has listened to farmer concerns that the commodity outlook is ugly in the short term.

“With the spectre of drought returning this summer, this cut will provide needed stimulus. “To reduce a major economic risk to the economy, the government must now prioritise water storage as part of its planned infrastructure package. New Zealand doesn’t lack for water, we just don’t bank the stuff when it’s plentiful.

“We fully support Dr Bollard in his call for financial institutions to pass on most of the 3.25 percent the Reserve Bank has cut from the OCR since July. Businesses are simply not seeing the OCR reflected in their overdraft interest rates. Dr Bollard is right to ask when businesses can expect the banks to pass on these lower wholesale interest rates to them.

Bruce Goldsworthy, acting chief executive of the Employers & Manufacturers Association (Northern) also demanded the banks should pass the full rate cut to their borrowers, saying, “So we need to see more explanation from the trading banks on the reasons why their margins appear to be widening as the wholesale interest rate comes down. Though the OCR has been reduced by 1.5 percent, bank announcements thus far indicate cuts of around one percent.

“Furthermore the banks making the most noise about the need for big cuts to the OCR ahead of today’s announcement appear to be the slowest off the block in reducing their own rates.”

International Comparison of Interest Rates