If business expects Alan Bollard to deliver lower interest rates any time soon it will be sorely disappointed - even slowing growth won't induce the Reserve Bank Governor to cut rates over the next few months.
In fact, it would be foolhardy to bank on a rate cut any time this year.
True, Bollard said last week that he had probably finished raising interest rates in the current cycle. But just because rates aren't going up any more it doesn't naturally follow that they'll immediately start going down, a point Bollard was at pains to make - but one which will probably be ignored.
"We see no prospect of an OCR easing, given the relatively high medium-term inflation outlook," he said.
The end of the tightening cycle already has banks and businesses eagerly forecasting the first rate cut. Businesses will point to the sub-2 per cent growth expected this year and say it's time to give the economy some renewed stimulus.
Some forecasters are expecting mid-year rate cuts and there may be a case for this based on the softer growth outlook alone. Certainly after four or five years of strong economic growth, annual gross domestic growth under 2 per cent will seem like a crawl.
But Bollard will remain squarely focused on inflation and will leave the OCR at 7.25 per cent for as long as he needs to.
Calls for rate cuts ignore the fact that several quarters of tepid growth will be needed to relieve the economy of built-up inflationary pressures after those years of red-hot growth. One or two soft quarters - although they'll have the business lobby screaming for lower rates - just won't be enough.
With low unemployment, strong wage growth and still increasing house prices, it's hard to see how inflation - now running at 3.2 per cent a year - will fall enough to let Bollard drop rates over the next few months. Under his inflation-fighting agreement with the Government, the Reserve Bank Governor has to keep annual inflation between 1 per cent and 3 per cent and so has little comfort zone to risk letting inflation climb higher.
Add the possibility that the New Zealand dollar could drop sharply and push up the price of imported goods and the chance that oil prices could climb further, and you see that Bollard won't risk cutting rates until he's certain he's beaten inflation.
Only rapidly rising unemployment, falling corporate profits, and the gloom accompanying a recession would halt inflation enough to allow a rate cut.
Certainly there are factors in place making New Zealand vulnerable to a recession: a ballooning current account deficit, inflation pressure, an overvalued housing market, a high dollar and high interest rates.
These factors alone won't cause a recession. That would have to be caused by a sudden and unforeseen external shock hitting New Zealand, such as a global downturn or another Asian financial crisis. Neither of these prospects appears likely at the moment.
Business has some justification in feeling a little hard done by. It is bearing the brunt of the rate rise through higher interest costs, while householders - whose uncontrolled spending caused the inflationary pressures and who are Bollard's real target - have so far largely been protected by fixed-rate mortgages.
And Bollard's statement in a speech on Friday that he can't adjust interest rates to help manufacturers and exporters who are struggling with offshore competition and the high New Zealand dollar won't have helped businesses' mood either.
The one consolation for business in having an OCR at 7.25 per cent is it gives Bollard a lot of scope to cut rates if the downturn gets too severe. By contrast, if the nascent Japanese recovery turns sour, there's nowhere for official interest rates in Japan - which stand at zero - to go.
As New Zealand's growth slows this year and business starts to feel the squeeze, calls for more accommodating monetary policy will grow more strident. But the reality is any rate cuts before the end of the year will be in response to a recession.
Business should be careful what it wishes for.
<EM>Christopher Niesche</EM>: Slow growth not enough to lower OCR
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