2008-12-03

Hot off the Press - Federated Farmers Media Release 'Farmers say 1.5 percent rate cut is needed tomorrow'

3 December 2008

Farmers say 1.5 percent rate cut is needed tomorrow

Federated Farmers is calling on the Reserve Bank to cut the Official Cash Rate (OCR) this Thursday by 150 basis points or 1.5 percent.

"In light of the Reserve Bank of Australia cutting its official cash rate to 4.25 percent, a 150 basis point cut is needed in New Zealand this side of Christmas,” said Federated Farmers economics spokesperson, Philip York.

“Even if a 150 basis point cut is implemented Thursday, our OCR will still be higher than that of our biggest export market, Australia. This cut is needed with farmers facing a rapid cooling in commodity prices and the potential return of drought over summer. A 150 basis point cut in the OCR will provide a much needed stimulus to the economy," Mr York said.

Analysis by Federated Farmers economists pointed to the new Government being constrained by pre-election spending pledges. This puts the Reserve Bank of New Zealand in the position of being able to stimulate the economy by easing monetary policy. Federated Farmers also points to projections by the National Institute of Water & Atmospheric Research (NIWA), predicting above average temperatures and decreasing soil moisture over summer in key regions. The risk of drought over summer is another point the Reserve Bank needs to factor into its OCR decision. Last season's drought cost the New Zealand economy an estimated $1.2billion.

"Fonterra's recent downward revision of its forecast payout by $0.60 per kilogram of milksolids will reduce on-farm income by $720m,” Mr York said.

“The 2008 Budget said that if international commodity prices for New Zealand’s exports were 10 percent lower than forecast through to 2010, it will wipe $8 billion off gross domestic product. We are now facing this reality.

"Demand for fibre is also being affected by the global economic slowdown. We are seeing a sharp retraction in demand from the building and construction industry and an easing demand for luxury fibres. We are now facing the same retraction within the arable sector. Arable commodities will take some time to recover given global liquidity lock and increased global output creating downwards price pressure.

“When we look towards lamb exports going into a struggling UK economy and a similar outlook for beef into the United States, Federated Farmers has a bearish outlook for 2009.

"Given the importance of farming to the economy, a 150 basis point cut in the OCR Thursday will partially offset falling commodity prices. The economy will benefit a cut of this size when it needs it the most," Mr York concluded.

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