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NZ Reserve announces major cut -

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NZ Reserve announces major cut

The World Today - Thursday, 23 October , 2008 12:18:00

Reporter: Kerri Ritchie

ELEANOR HALL: Across the Tasman, the Reserve Bank of New Zealand is certainly not upbeat about the
outlook for that economy.

This morning it delivered its biggest single interest rates cut ever - lowering rates by a full
percentage point to 6.5 per cent.

As New Zealand correspondent Kerri Ritchie reports - it is the third cut in the official cash rate
this year.

KERRI RITCHIE: As the world stares down the barrel of a recession, New Zealand has already been
hit. The country declared it was technically in recession a month ago and to see the impact you
just have to buy a copy of the "New Zealand Herald" newspaper. That is if you spare the $1.70.

Last week the paper was reporting that the nation's largest and most loved music shop, Real Groovy
Records was going into receivership. Today the newspaper reports house prices have plunged and
100,000 New Zealand home-owners are now in negative equity.

This morning the Reserve Bank stepped in, cutting the official cash rate by one per cent. The OCR
is now 6.5 per cent. Chief executive of Business New Zealand, Phil O'Reilly says it is welcome
news.

PHIL O'REILLY: It will help business confidence because I think most businesses were expecting Alan
Bollard to do something pretty big today in the order of three-quarters of a per cent or a per
cent. He came out towards the top end of those expectations.

Business will have factored in the probability that interest rates will have gone down by this much
so more the head space, more the fact that he has done it now. He has confirmed that he's doing it.
He is talking about inflation being squeezed out of the economy.

That will give businesses a little more confidence about the potential of future investment, future
spending and future markets.

KERRI RITCHIE: Mr O'Reilly says many New Zealand businesses are struggling.

PHIL O'REILLY: We know some businesses are already struggling to borrow enough to meet their needs
but for the vast majority of New Zealand businesses, yes credit is a significant issue but also the
cost of credit.

KERRI RITCHIE: He says there are a few positive signs.

PHIL O'REILLY: The New Zealand economy was really kind of a two-speed economy. The domestic economy
had been going gangbusters and a lot of that was based on domestic housing, strength in that sector
and exporters were really suffering.

Well, the tables have turned and in a sense, economically speaking, that is a good thing. I mean I
don't wish ill on any business of course but we do need export-led growth and if we can achieve
that outcome then it will be very good.

But, as you say, for domestic businesses times are a little tough right now. No question. Bank
interest rates are likely to come down. Probably not by the full one. Maybe, maybe they will but my
sense is that international credit pressures will keep at least some of that margin back for banks.

KERRI RITCHIE: The New Zealand Government has followed Australia's lead and is guaranteeing bank
deposits.

Treasury secretary John Whitehead says there is anecdotal evidence some people are shifting their
savings around looking for safe havens but he says New Zealand's banking system is robust.

JOHN WHITEHEAD: We've been in a very strong position I think and one of the advantages of being at
the other end of the world I suppose is that most of our banking transactions are pretty vanilla.
None of these sophisticated instruments that really tend to hide risk in the way that they do.

The conversations I've had with the banks in more recent times has actually further reassured me on
that point.

KERRI RITCHIE: But he says it is a slippery road ahead for all countries.

JOHN WHITEHEAD: Nobody is immune when you get a world situation like this. We have to be cautious
and we have to be ready.

KERRI RITCHIE: The annual rate of inflation in New Zealand is 5.1 per cent. That is the highest it
has been for 18 years. The Reserve Bank wants to get it down to between one and three per cent. New
Zealand will hold an election in just over a fortnight. Mr O'Reilly says whoever forms the next
government needs to think long term.

PHIL O'REILLY: So really what we are after is policies that have good impact now but are helpful
for the future and that will relate to things like ongoing tax cuts if those are available to us,
infrastructure spend and so on. These kinds of things are probably a good idea now and they work
for the long-term future.

ELEANOR HALL: And that is the chief executive of Business New Zealand, Phil O'Reilly ending that
report from Kerri Ritchie.