It's a close call on further OCR cut

Alan Bollard

It is a line ball call whether Reserve Bank governor Alan Bollard will cut the official cash rate again on Thursday or decide to wait and see.

Money market pricing implies little more than a one-in-three chance that he will cut, but in the most recent Reuters poll of market economists only six out of 16 regarded no change in rates as the most likely outcome.

Even those who expect Bollard to sit tight believe the accompanying monetary policy statement will be dovish, leaving the door open to further cuts, and that he will try to talk the dollar lower.

Among the new information the bank has had since its last OCR review at the end of April, the dollar's rise is most likely to concern it, economists say.

Since then the Kiwi dollar has appreciated more than 12 per cent against the US dollar and more than 7 per cent on a trade-weighted basis.

That is despite there being only a modest uptick in world prices for New Zealand's export commodities, and Fonterra slashing its payout forecast for next season.

And while the tenor of the economic data from the country's trading partners has improved, it is only to the point of representing a slower rate of decline, not a recovery.

Westpac economist Michael Gordon said that while the Reserve Bank would regard the kiwi's recent strength as unwarranted, it was not obvious that it should respond to it.

It depended to what extent it reflected financial markets in general.

Insofar as it was part of a general improvement in sentiment and risk appetite and a greater willingness on investors' part to stray from the safe haven of the US dollar, there was not much the bank could do about it.

"From the Reserve Bank's point of view it doesn't hurt to wait this time," Gordon said.

If it was still sceptical about the vigour of green shoots abroad and if it was right about that, it would be proven right and the markets would adjust.

ASB economist Jane Turner said the Kiwi dollar's rise reflected US dollar weakness. "In the contest for the worst economic fundamentals, New Zealand is not coming last."

Also in the sit-tight camp is Deutsche Bank's chief economist, Darren Gibbs. He points to domestic indicators which challenge the rather bleak view the Reserve Bank put forward three months ago.

The housing market has seen activity pick up and some signs of prices stabilising.

And much of the monetary easing the Reserve Bank has already done has yet to flow through to the average rates people with mortgages are paying, because of the time it takes for fixed-term loans to mature.

NZIER economist Shamubeel Eaqub estimates households' combined interest bill has some $2 billion yet to fall. "That's 2 per cent of annual household disposable income - a considerable boost," he said.

Net migrant flows are also boosting demand as fewer New Zealanders leave seeking greener pastures abroad.

In real terms retail sales in the March quarter shrank nearly 3 per cent, reinforcing expectations that quarter will prove the weakest yet in this recession.

But Gibbs said that in the past a rebound in the housing market had portended one in consumption too.

Gordon cites the impact of the Budget as another positive factor. The Treasury estimates the fiscal impulse over the coming year to be 3.3 per cent of gross domestic product or twice what was forecast six months ago. Even though the increase in Government spending is smaller than last year and further tax cuts have been cancelled, revenue has fallen sharply, increasing the net supportive influence of fiscal policy.

Turner said the Reserve Bank had already delivered most of the stimulus it was going to in this cycle. "Any further small cuts are essentially fine tuning at the margin."

They would make little or no difference to what the banks had to pay depositors.

While the Reserve Bank was unlikely to be comfortable with where the currency and longer-term interest rates were now sitting, said Turner, local monetary policy was having very little influence on those markets at the moment.

BOLLARD'S DILEMMA

THE CASE FOR A CUT
The dollar has climbed in the past six weeks, the last thing an economy needs when it is deep in recession and needing to redirect its energies from consumption to exporting. Fonterra has cut its forecast payout.

THE CASE FOR SITTING TIGHT
The housing market is perking up and where it goes consumption will follow. Migration is strengthening, so is business confidence, fiscal policy is supportive and the full benefit of past rate cuts has yet to be felt.