OCR cut was inevitable given dairy giant slowdown

Statement by James Kellow – Director of New Zealand Mortgages & Securities

OCR cut was inevitable given dairy giant slowdown

This morning’s Reserve Bank Official Cash Rate cut of 25 basis points from 3.25% to 3% was inevitable particularly when you consider the immediate and widespread impact of the dairy slowdown across the country, says Auckland property financier James Kellow - director of New Zealand Mortgages & Securities

“Yes there’s a lot of moving parts to the New Zealand economy and many other sectors are doing well. However we can’t shy away from the fact that dairy has historically been New Zealand’s biggest export earner and when Fonterra sneezes, the rest of the country catches a cold,” says Mr Kellow.

“Last month we saw the first cut in the ORC in four years but now it’s all on. In recent months we’ve seen dairy prices fall much further than expected and at the same time the Reserve Bank is conscious it needs to nudge up very low inflation and get back within its 1% - 3% inflation target band.

“The lower dollar will be helping our exporters somewhat as well as creating some inflation from increase fuel and import costs. However last week’s much poorer than expected dairy auction will have further eroded business and consumer confidence,” says Mr Kellow.

“Falling milk prices won’t just affect farmers and businesses in New Zealand’s dairy-rich service towns. Auckland will not be immune. You just have to look at the 523 job losses mostly in middle management recently announced by Fonterra.”

With retail banks already slashing their one and two year rates below 5%, Mr Kellow doesn’t believe a lower OCR and subsequently lower interest rates will necessarily mean more people will now rush off and buy a house or borrow more money.

“The Reserve Bank has tightened up borrowing rules with the retail banks to ensure more prudent lending to people, and of course from 1 October new LVR and tax changes will target investors.”

“I think short-term mortgage rates are probably only going to get lower with another cut to the OCR on 10 September increasing likely,” says James Kellow.

ENDS

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