Alan Bollard cut the cash rate this morning down to 8 per cent - analysts had been divided as to whether he would drop the rate this morning or wait until September with further inflation data available.

However since most banks in New Zealand rely on the majority of their funding from overseas how much of an effect is this likely to have on current mortgage rates. You need to therefore look at the 2 year swap rate to get an indication on the effects of this cut this closed at approximately 7.40 dropping about 18 bps today - to get an idea of the rate you will get from the retail banks typically add 100 - 150 bps as their margin on this. So a 2 year rate of 8.9% for lending on residential property from most banks would be considered ok and at the time of this blog being written ASB have just cut their 2 year rate to 8.95%. However because of the rising costs of borrowing overseas it is expected that most banks won't change their rates just yet.

Kiwibank whom funds itself entirely on the domestic market and so would benefit the most out of all the banks with the rate cut has indicated this morning that it would not cut interest rates immediately as a result of this morning's cut. However there is a potential that if Kiwibank decides to lead the lending market again that the other banks will follow and we will see rates ease slightly across the board.

On a more positive note the NZX50 reacted strongly to the news and after a 1.8% increase yesterday jumped up 1.2% after the rate cut announcement and finished strongly with a 2.7% rise the biggest rise all year. Some of the export and currency sensitive stocks such as Rakon and Air New Zealand jumped up by between 4-5 percent today. Until recently the New Zealand share market has been trading at 3 year lows and had tumbled 25% since its October 2007 high. A good rule of thumb for a bear market is a 25% peak to trough share price movement so arguably we were at these levels so perhaps we have got near the bottom.

In the aftermath of the US tech-crash early this decade, the S&P500 index plummeted nearly 50%, and the Nasdaq by 80%. Much like the US, the New Zealand market had enjoyed a dream run, but when global shares toppled in 2001-03, domestic equities went sideways and when other markets recovered, New Zealand went with them. As a result, New Zealand shares were inflated in price and the market overvalued. Fast-forward to now and the market remained very expensive versus global equities. Basically the market is still not particularly cheap it was very expensive late last year so despite a 20% fall, it's now only close to fair value."  Comments made by Jason Wong FNZC on stuff.co.nz

The New Zealand dollar fell heavily against all the major currencies after the Reserve Bank today brought forward its easing cycle. Alan Bollards comments were described as being one of the most "dovish" and set the scene for a series of rate cuts ahead.

The kiwi immediately lost nearly one US cent and despite attempting to claw that back, ended the session on US74.30c from US75.56c yesterday.

Against the Aussie, the kiwi fell to A77.51c from A77.99c yesterday and with falls against all the other currencies, the trade-weighted index ended on 66.28 from 67.13.

This potentially could potentially signal the end of the carry trade -- where traders borrow in low interest regimes like Japan and invest in high rate regimes like New Zealand. It will put pressure on the NZ dollar but we are still going to have higher short-term interest rates than a significant number of our trading partners so the carry trade argument still stands although less in favor of the NZ dollar

Rumors had been floating around about Hanover since last year so it was only a matter of time before some of these came to fruition however the "freeze of funds in Hanover" can also be apportioned to a meltdown in the finance company sector and a complete loss of faith of investors in this product. In fact once the dust settles it looks like only the stalwarts such as UDC and South Canterbury Finance will remain.

 When looking at the risk v reward ratio's one would argue that right now Rabobanks Cash Advantage Fund is looking pretty appealing right now. If you are a 39% tax payer your tax payable on savings in this account is restricted to 30% and tax is paid annually as opposed to monthly in a standard savings account. Plus the interest rate is calculated daily so you need to be getting better than a effective interest rate of 9.92% to be beating this and when this is combined with a AAA credit rating (better than the NZ Government) how can you compete!

 So a little bit of good news this week combined with petrol easing back after barrel prices dropped back to USD $127 and the extra good news is that this has been translated into the prices at the pump.