Big rate cut coming next week, say ASB economists

Reserve Bank Governor Alan Bollard / Photo Mark Mitchell

ASB economists are predicting a 1 percentage point cut to official interest rates next week.

Reserve Bank Governor Alan Bollard is set to look at rates next Thursday, March 12. He will also be releasing a "Monetary Policy Statement", a quarterly review of what the bank is thinking about the economy, especially future growth and inflation rates

If the ASB economists are correct and Bollard cuts the OCR by 100 basis points, it would mean a fall from 8.25 per cent to 2.5 per cent in less than a year.

A publication written by the bank's economists issued today says they expect the 1 per cent cut next week "on back of further deterioration in the global economic outlook."

Forecasts for global growth continue to be revised down and ongoing pessimistic data point to further downside risk," said ASB chief economist Nick Tuffley.

"At home, the economic outlook also continues to deteriorate, with NZ set for some sizable falls in GDP over the next few quarters. Compared to Australia, monetary policy is less immediately potent and fiscal stimulus more constrained, pointing to the need for lower interest rates," he said.

There is was a risk that the Reserve Bank might opt for a smaller OCR cut, with the consensus among economists split between a 50 basis point cut and a 100 basis point cut. Market pricing is half way between 50 and 75 basis points.

"If the RBNZ does cut by less than we expect, then future OCR cuts are likely to more drawn out. We remain convinced that a 2 per cent cash rate is appropriate for New Zealand," said Tuffley.

The ASB economists are expecting another two quarters of economic contraction.

"NZ has been in recession for about a year now, and we do not expect to see positive GDP growth until 2010. Business confidence remains very weak and employment indicators continue to deteriorate. We now expect unemployment to reach 8 per cent."

The decision by the Reserve Bank of Australia to keep official rates on hold yesterday was seen by some as a signal that our Reserve Bank could opt for just a small cut here. Not so, says the ASB economists.

"Even with Australia's 0.5 per cent contraction in Q4 GDP, the Australian economy is faring remarkably well compared to New Zealand and the rest of the world. In Australia's favour are more immediate transmission of monetary policy easing and much greater scope for fiscal spending."

This is because most Australian mortgages are on floating rates, meaning any move by their Reserve Bank gets passed on quickly.

" In NZ, the preference to fix over the past few years means many households are yet to benefit from lower interest rates."

For next week's decision, the consensus of economists is split between a 50 basis point cut and a 100 basis point cut, and the market pricing is positioned around halfway between 50 and 75 basis points. The RBNZ may well opt for a smaller cut than we anticipate. If that is the case future cuts are likely to be more drawn out, but we remain convinced that the RBNZ will still eventually cut the OCR to 2.0 per cent.

- HERALD ONLINE