Global trends make more rate cuts likely

By BRIAN FALLOW economics editor

With inflation falling and expectations of growth in the world economy being slashed, pressure is mounting for the Reserve Bank to cut another half a percentage point off interest rates on November 14.

The consumers price index, issued yesterday, showed prices rose 0.6 per cent in the September quarter, in line with market and Reserve Bank expectations.

That brought the annual inflation rate down to 2.4 per cent, back within the bank's 0 to 3 per cent target range for the first time in a year.

More significant for the interest rate outlook was a fresh set of numbers from Consensus Forecasts, which polls economists around the world for their view of the growth outlook in their respective countries.

At the time of the Reserve Bank's last monetary policy statement, in August, the forecast for growth in New Zealand's top 10 trading partners was 2.1 per cent for this year, recovering to 3.4 per cent next year.

By the time Governor Don Brash cut half a percentage point off rates after the September 11 attacks, trading partner growth forecasts had been cut to 1.8 per cent this year and 3.1 per cent next year.

Now they have dropped again, to 1.3 per cent this year and 2.2 per cent next year.

That is a cumulative drop of 2 per cent off trading partner gross domestic product over the two years.

Bank of New Zealand economist Stephen Toplis said the only thing now preventing the Reserve Bank from slashing rates dramatically was the view that the economy could hold together despite the global decline.

"We, too, believe New Zealand is well placed to outperform over the next year or so," Mr Toplis said.

"However, there may be a very real risk that we are kidding ourselves about the extent of that outperformance."

WestpacTrust chief economist Adrian Orr now believes Dr Brash will cut the official cash rate (OCR) 50 basis points to 4.75 per cent next month. He expected international growth forecasts to be revised down further yet, and said domestic confidence was shaky.

It was better to "do it big up front" than dole out rate cuts in dribs and drabs, Mr Orr said.

Deutsche Bank economist Darren Gibbs said a 25 point cut on November 14 was a done deal and that there was a "fair chance" of 50 points. "Indeed, while it is not our central call, should the flow of data remain very negative we think it is not inconceivable that the OCR could be lowered to 4.5 per cent following the January 24 meeting." That would be as low as the rate has ever been.

Yesterday's inflation figures were seen as offering scant grounds for resisting further easing.

More than half of the quarter's 0.6 per cent increase came from food prices, especially dairy and beef prices which went up in line with higher export prices.

Annual rises in local body rates and the tax on liquor contributed 0.2 percentage points between them.

The main items to fall were international air fares (a seasonal effect) and petrol, down 4.1 per cent on June. Household electricity prices, which the Reserve Bank had thought might rise 4 per cent, were unchanged.

Overall, fewer of the items in the CPI basket rose in price than in the previous quarter, and the rises were more modest.

One of the Reserve Bank's indicators of "core" inflationary pressure, the weighted median, rose 0.3 per cent for the quarter and 1.8 per cent for the year.

Inflation was higher (0.7 per cent) in the tradeables sector, where prices are subject to international pressures, than in the non-tradeables sector (0.5 per cent).