Any excuses the Reserve Bank had saved for not reducing its official cash rate by 1.5% this morning disappeared when dairy company Fonterra slashed its forecast payout.
Fonterra had forecast a payout of $6 per kg milk solids (kg/ms) as late as November but yesterday fulfilled the market's worst fears with a reduced payout forecast of $5.10.
The 90c reduction wipes $1.1 billion from the economy, but even worse, total dairy incomes are expected to be around $2.4 billion lower than last year, when Fonterra paid suppliers $7.90 kg/ms.
The central bank was widely expected to drop its OCR 1% to 4%, but Westpac economists said this week that a cut of 1.5% was not out of the question.
In a break from tradition, the Reserve Bank governor Alan Bollard will hold a press conference on the OCR decision and deliver a statement at the end of the usual media lock-up.
The press conference will be webcast on the bank's website www.rbnz.govt.nz from 9am.
A Reserve Bank spokeswoman said that while OCR reviews were not commonly accompanied by press conferences, the bank's experience with the press conference after the October OCR decision suggested that it would again have the benefit of allowing the governor to respond to questions in these uncertain times.
Otago Chamber of Commerce chief executive John Christie said the reduced payout would have a significant effect on the economies of both Otago and Southland.
The reduced payout was predicted, but the amount of the reduction would have come as a shock for many, particularly farmers who had carried out recent farm conversions, when the payout was at a record high.
The speed and the size of the cut would have taken many people by surprise.
Suppliers to the dairy industry would be hard hit.
Money from conversions flowed through the wider community from the businesses supplying the sector through to the workers in those companies spending money in local shops, he said.
"Demand will come off and there will be a rationalisation of that spend. It may even affect land prices.
"When our rural communities are doing well, our service sectors are doing well. The less wealth at the farm gate means less wealth for all of us.
"We have all enjoyed the fruits of rising commodity prices, but we will also feel the pain in the decrease in a corresponding way."
The Fonterra Shareholders' Council said it was disappointed by the magnitude of the drop in the payout for the season.
Council chairman Blue Read said although the company had signalled that global financial and market conditions were putting pressure on the payout, the 90c drop would surprise many Fonterra farmers.
"After a record payout last year, we went into the season with a payout forecast of $7 kg/ms. We are now confronted by a reduction of more than 25% in our farm revenues for the season."
Dairy farmers were used to fluctuating forecasts and the uncertainty that created, but in the current environment, farmers would like to see more timely updates, he said.
