KEY POINTS:
Reserve Bank Governor Alan Bollard showed a gentler face yesterday, indicating he is starting to worry more about growth than inflation and that he may start to cut interest rates earlier than he indicated last month.
As expected, he left the official cash rate at 8.25 per cent, but whereas six weeks ago he said it would have to remain there "for a significant time yet" the language was softened to "for a time yet".
He acknowledged the economy was weakening more rapidly than the bank expected last month, but went on to list factors that will limit the slowdown - a strong labour market, still high export commodity prices and the "possibility" of tax cuts.
While the weaker economy will "over time" lessen upward pressure on prices the bank still sees upside risks to inflation, especially from a wage-price spiral if pay settlements respond to repeated rises in food and energy costs rather than to weakening economic activity.
Westpac chief economist Brendan O'Donovan said the statement indicated the balance of concern had shifted from inflation to growth. The bank was signalling it would start cutting the cash rate sooner than it had foreshadowed in March - which was the second half of next year. "The question is how much sooner."
A poll taken by Reuters after the statement found that four of the 16 forecasters now expect the bank to have started cutting rates by the end of the September quarter and only four expect the OCR still to be at 8.25 per cent by the end of the year. In the previous poll half had thought it would still be on hold at year's end.
Deutsche Bank chief economist Darren Gibbs said that once the Reserve Bank was confident it had inflation licked it would lower rates quickly.
It had learned when raising rates that with a high proportion of mortgage debt at fixed rates it took a long time for its tightening moves to flow through to the average mortgage rate people pay.
"Getting that tightening back out of the system is going to take time as well."
ANZ National Bank chief economist Cameron Bagrie said yesterday's statement hinted at a darker view of the prospects for world growth and also referred for the first time to tighter credit conditions facing borrowers here.
Loans have become harder to get as well as more expensive and the effects of that on economic activity would be felt over the second half of the year.
Bagrie said Bollard would start to ease in September and would have cut the OCR to 7 per cent by the end of March next year.
The trigger would be a "shocker" of a jobs report for the June quarter. The labour market was the big driver of medium-term inflation, he said. "Once we start to see unemployment [now 3.4 per cent] tick back up he will take comfort."
Westpac's O'Donovan does not expect the OCR to start falling until this time next year. The bank might go sooner, but it would be a mistake, he said.
"When firms and households are feeling grumpy because of high inflation it doesn't make a lot of sense to cut interest rates and exacerbate inflation."
BNZ economist Craig Ebert detected an underlying comfort on the Reserve Bank's part that inflation would in time be brought under control in a comment that could be taken as talking the dollar down.
While it helped to moderate headline inflation, the persistently high dollar remained a drag on export growth, Bollard said.
Ebert said: "It's almost as if the bank would prefer the dollar to ease off, giving oxygen to the export sector, to offset the clear stalling of the domestically focused sector."
WHEN WILL RATE CUTS START?
* September, says ANZ National Bank, and the pressure may come off through the exchange rate even sooner.
* December, says the BNZ, followed by a string of cuts next year until the OCR is back to neutral - about 6 per cent.
* December, says ASB, though the exact timing and speed will depend on how much of the easing work the dollar does.
* December, says Deutsche Bank, and the decline will be steep.
* Not until this time next year, says Westpac. We are in for a robust rebound next year and inflation will still be problematic.
