KEY POINTS:
The Reserve Bank is expected to leave interest rates on hold next Thursday, but a 25-point cut is forecast within the next two months as a stalling economy outweighs rising inflation concerns.
The RBNZ's Official Cash Rate is at a high 8.25 per cent, but poised to fall soon despite inflation at 4 per cent - well above the bank's target band of 1-3 per cent - in part on the back of record high oil prices and soaring food prices.
The central bank has said it could look past factors such as oil prices, and indicated at its last review that a rate cut was coming in September to help provide some stimulus to an economy well past its recent peak.
BNZ economists said the bank was concerned that the current inflation problem could tip into deflation, as rising prices dampen consumer spending power.
"In the last MPS, the RBNZ noted that `we believe that the medium term disinflationary effects of the weaker growth outlook are sufficient to more than offset the effect that the near-term spike in headline inflation will have on inflation expectations'. Surely the same can be said again," said BNZ economist Stephen Toplis.
But the Reserve Bank's desire to dampen down expectations of deep rate cuts - with the markets currently pricing in an OCR of 7 per cent by next March - and uncertainty about medium-term inflation risks would ultimately stay its hand, he said.
Rising costs of sourcing money offshore for retail banks would probably eat into any fall in the OCR, keeping the pressure on mortgage holders.
Economists at Moody's Economy.com expect the Reserve Bank to cut the OCR to 8 per cent next week and by another 25 points in September as it moves to counter a recession.
"Given the long lag in the effect of monetary policy on the economy, the wide acknowledgement that the elevated inflation rate is imported, and the sharply deteriorating economy, monetary loosening should happen soon," said Alaistair Chan of Moody's Economy.com.
Falling retail sales, rising unemployment, and worsening business confidence are among poor recent data pointing to a contracting economy in the first half of the year.
"New Zealand grew to the point of overheating in 2007, but the boom has come to an abrupt halt. After growing 3.2 per cent in 2007, the country will grow only 1.2 per cent this year," he said.
Economists polled by Reuters forecast a 60 per cent median risk of no change, and a 40 per cent chance of a 25-point cut on Thursday.
All 17 economists expected a lower OCR within two months.
"What sways us towards a September move is that the softer growth picture since June doesn't diminish the risk of creating new problems by easing more aggressively than the market expects," said Westpac chief executive Brendan O'Donovan.
A slow and steady approach would minimise the risk of an embarrassing policy reversal if inflation expectations get out of control, or the economy recovers quicker than expected, he said.
- NZPA
