KEY POINTS:
The Official Cash Rate (OCR) could be down to 6 per cent by the end of next year, says one bank economist.
But it won't come down in a rush, with the Reserve Bank likely to take its time cutting rates, wary of the impact on the currency, said ANZ senior economist Khoon Goh.
"The bank will be cognisant of the fact that an aggressive easing cycle will cause a sharp fall in the currency, something they will want to avoid," he said.
The Kiwi dollar fell rapidly this morning after the Reserve Bank today left the OCR unchanged at 8.25 per cent. Governor Alan Bollard signalled that slowing economic growth meant it was likely he would soon be cutting it.
The kiwi steadied at $0.7695 after tumbling about 1 percent just after the rate announcement and fell as low as $0.7686.
"One of the reasons we are not projecting even more easing in monetary conditions is because the experience of the 1970s warns us of the danger associated with easing monetary conditions too rapidly in the face of sharp oil price increases," said today's Reserve Bank statement.
The key issue, says the ANZ's Goh is not the exact timing of the impending "easing cycle", but the magnitude of the OCR moves. Markets had moved to price in lower rates from September.
Given the high starting position of the OCR, a strong case could be made for an "aggressive cycle, where rates are moved lower in sharp order."
"At this stage, we are pencilling in a series of steady 25 basis point cuts starting from September, taking the OCR towards the neutral zone of around 6 to 6.5 per cent by the end of 2009," said Goh.
"However, the RBNZ's wariness over elevated inflation expectations, and their concerns over the impact of an unorderly currency adjustment, means that we could be in for a staggered and elongated easing cycle."
This would take the form of three or four rate cuts, followed by a pause, then the start of another mini easing cycle.
He said that looking at the way this is done overseas, he had "some sympathy" for the way the Bank of England went about the job cutting interest rates, then pausing, before cutting again.
Westpac economist Sharon Zollner said the Reserve Bank looked overly pessimistic on growth.
"They're picking a slowdown that's much longer than New Zealand typically sees," she said.
"In our experience it's not how the New Zealand economy works, and based on the fact some of the slowdown is drought-related we think there are factors that are going to cause growth to bounce back, so we would definitely see upside risks to their assumptions."
First NZ Capital chief economist Jason Wong said "it was a pretty good statement in a very challenging environment".
"It's softer than the market expected, but it's hard to disagree with what they're saying. We're seeing an oil shock, which while creating inflation pressure also creates a much weaker economic environment further down the track, which is what the (Reserve) Bank's reacting to."
- NZ HERALD. NZPA
