As widely forecast, the terrible second Christchurch earthquake last month has seen the New Zealand Reserve Bank slash its key interest rate to the record-equalling low set during the global financial crisis of 2.5%.
The cut, of half a per cent, was a bit bigger than the 0.25% trim some forecasters had expected.
And the central bank governor Alan Bollard said in a statement that borrowing costs will remain low until the rebuilding of Christchurch after the two earthquakes, takes hold.
“We have acted pre-emptively in reducing the cash rate to lessen the economic impact of the earthquake and guard against the risk of this impact becoming especially severe,” Mr Bollard said in a the post meeting statement yesterday.
"The current monetary policy accommodation will need to be removed once the rebuilding phase materializes. This will take some time."
It was the first cut in the country’s cash rate since April 2009.
It will come as some relief to the country’s homeowners and businesses, despite some hardline commentators claiming the cut will add to inflation.
Even though inflation in New Zealand is higher than in Australia, thanks to the one off GST boost late last year, the slump in activity in the economy should help produce a reduction later this year.
But price levels will come under more upward pressure as the rebuilding of Christchurch happens in 2012.
“The earthquake has caused substantial damage to property and buildings, and immense disruption to business activity," Mr Bollard said in his post decision statement.
"While it is difficult to know exactly how large or long-lasting these effects will be, it is clear that economic activity, most certainly in Christchurch but also nationwide, will be negatively impacted.
"Business and consumer confidence has almost certainly deteriorated.
“Even before the earthquake, GDP growth was much weaker than expected through the second half of 2010.
"Households have continued to be very cautious, with retail spending volumes and residential investment both declining.
"The export sector has benefited from very high commodity prices; however, farmers have focused on repaying debt rather than increasing spending.
"Also the early summer drought constrained farm output through this time.
"Signs that the economy was beginning to recover early in 2011 have been more than offset by the Christchurch earthquake.
“In putting together the forecasts underlying this Monetary Policy Statement, the Bank has had to make many important assumptions based on limited information.
"Over the coming weeks and months, these judgments will be tested as new information comes to hand.
"For now, GDP growth is projected to be quite weak through the first half of the year.
"This will gradually build up to a very large reconstruction programme by 2012 that will last for some years and contribute to a period of relatively strong activity.
“Future monetary policy adjustments will be guided by emerging economic data.
"We expect that the current monetary policy accommodation will need to be removed once the rebuilding phase materialises.
"This will take some time. For now we have acted pre-emptively in reducing the OCR to lessen the economic impact of the earthquake and guard against the risk of this impact becoming especially severe.”
Earlier this week, the NZ Treasury said there were inflationary pressures throughout the global economy, and the Christchurch reconstruction was so large it would inevitably have an impact on inflation.
It pointed out that the faster the rebuild, the greater the pressure on prices.
The central bank expects inflation will come back within its target band of between 1% and 3% once the effects of last year’s hike in consumption tax flow through, and forecasts 4.4% growth in the consumer price index in the March 2011 year, slowing to a pace of 2.1% in 2012 and 2.4% in 2013.
Economists said the unknown timing and size of the Christchurch rebuild will complicate forecasting of growth, inflation and other activity.
The May budget will see greater detail on the rebuilding, its cost and how it will be paid for.
That will be complicated by the liquefaction problem which has destabilised thousands of homes and buildings across the region, making it possibly unsafe to repair or rebuild.
A further complication is that around 70,000 people have left the city since the second quake, many of whom have no homes in the city.
Finding them jobs, accommodation and/or paying them unemployment benefits will add to the costs.
The RBNZ didn’t publish quarterly forecasts, but said GDP had “held steady” in the fourth quarter of 2010 and the quake likely reduced growth by 0.6 percentage point in the three months ending March, making it “quite possible” the economy shrank.
It forecast that the economy will grow an annual average of 0.9% in the year ending March 31, less than the 1.7% forecast in December.
By this time next year, the RBNZ said it expects growth to have improved to 2.7%, down on the 3.4% forecast in the December Monetary Policy Statement.
