The Reserve Bank's interest-driving official cash rate (OCR) appears set to remain the highest in the developed world for some time, especially with kiwis stubbornly resisting messages to save more money.
Earlier this week, Reserve Bank governor Alan Bollard slashed the OCR by an unprecedented 1% to 6.5%, having held it at 8.25% for a year since June last year; initially to damp down the booming property market and later to try and negate rising inflation.
Inflation is beyond 5% at present, well outside the bank's outer 3% target, and Dr Bollard has hinted at further OCR cuts, if inflation is reined in.
Westpac's chief economist, Brendan O'Donovan, said if the OCR was considered too high, households would have borrowed less in recent years and saved more "Instead of saving, we have been on a debt binge for the past five to 10 years," Mr O'Donovan said yesterday.
He said with the benefit of hindsight, the OCR should have been raised in 2003 by the Reserve Bank, and not cut, to begin damping the property market, which was heating up; the attractive gains subsequently fuelling more debt for many households.
"That [2003 rise] would have stymied the property market at the time," he said.
In January 2007, the Reserve Bank began raising the OCR, moving from 7.25% to 8.25% by June. However, borrowers took "scant notice" of 0.25% rises and there was little reaction.
"It wasn't until it hit 8.25% that borrowers started to squeal and realised they had no place to hide," he said.
On the question of why New Zealand's cash rate is always highest in the developed world, Mr O'Donovan believed it was the absence of any capital gains tax applied to the housing market.
The OCR was likely to remain the highest, until an age demographic of the present 40-50-year-olds begins flowing through to retirement.
Armed with better financial literacy, that group should be borrowing less and saving more which could result in the OCR being cut to the levels of other developed countries.
Mr O'Donovan reeled off the cash rates of several countries, saying Argentina's 13.64% rate and the 23.66% rate of Venezuela reflected economies with persistent double-digit inflation, but also struggling currencies.
"The emerging economies are getting kicked and will continue to get kicked hard," Mr O'Donovan said of their weakening currencies.
BNZ chief economist Craig Ebert said the OCR was the highest in the developed world, as the Reserve Bank needed to use it as a tool to regulate demand in the economy.
"We [New Zealand] build up a lot of inflation pressure, which pushes core inflation well above target levels," he said yesterday.
New Zealand has a high percentage of home-ownership and the recent housing boom prompted the higher OCR as homeowners extended borrowings and spent on the back of increasing home values.
He believes if the Reserve Bank had not held the OCR at 8.5% for a year, but had dropped it to 3%-4% during the past year, inflation could be running at more than 10%.
• The next OCR announcement is due on November 11.
Bank rates elsewhere
Argentina 13.64%
Venezuela 23.66%
South Africa 12%
Romania 10.25%
Iceland 12%
Moldovia 17%
Khazakstan 10.5%
