The Reserve Bank has reduced the Official Cash Rate by 50 basis points to 7.5%.
Bank Govneror Alan Bollard said the rate was decreased because the domestic economy is slowing, the global economy is deteriorating and a combination of increasing costs and decreasing demand is putting pressure on businesses.
“While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below-average growth.
“The weakness in economic activity is expected to translate into lower inflation pressures in the medium term. Headline inflation is expected to peak around 5 percent in the current September quarter before trending down thereafter. However, food price inflation, exchange rate depreciation and higher wage costs will tend to keep headline inflation at elevated levels through 2009.
“With medium-term inflation pressures expected to ease, it is appropriate to move towards a less restrictive monetary policy stance. Compared to the June Monetary Policy Statement, we have brought forward some of the projected interest rate reduction, but have not altered the expected overall decline. We believe this response is warranted in light of the tightness of current credit conditions and the time it will take to affect the actual interest rates faced by households and businesses.”
The dollar dropped by half a US cent to 65.67 cents after the annoucnement.
A lot of commentators say that is good for exporters. But when I look at the big ticket items in farmers’ budgets I think any gain we get from higher returns will be cancelled out by the increase in costs for fuel, fertiliser and any other imported inputs.