Rate cut coming - but how big?
An interest rate cut is almost definite this week, however economists are divided on whether it will be a 25 or 50 basis point cut.
Monday, June 2nd 2003, 9:15PM
by Jenny Ruth
The wholesale interest rates market has well and truly jumped the gun as far as anticipating the Reserve Bank’s decision on Thursday on where to put its Official Cash Rate (OCR).
Although the OCR is currently 5.5%, the 90-day bank bills ended last week at 5.25%, suggesting market participants expect the OCR to be cut to at least that level. In late April, the Reserve Bank took the market by surprise and cut the OCR from 5.75%.
While everyone is expecting a cut, economists are somewhat divided as to whether it will be to 5.25% or to 5%.
Bank of New Zealand economists look back to the last economic slowdown in 2000 and note that while the very weak currency came to the rescue then, helping to ensure a soft landing, it is unlikely to do so this time around. In fact, the already strong New Zealand dollar is likely to continue rising.
"We remain cautious that the slowdown could be more abrupt than expected," BNZ says. Concerns about the currency combined with last week’s National Bank survey showing a net 44% of businesses expect the economy to worsen over the next year bolsters the chance of a 50 basis point cut, it says. BNZ is still picking only a 25 point cut.
ASB Bank chief economist Anthony Byett is also forecasting a 25 point cut. A key reason not to go for 50 points is the buoyant housing market.
While the latest housing consent figures showed a 10.7% drop in April, they are still at very high levels, Byett says. The April fall might only reflect the Easter and ANZAC Day holiday-shortened month, he says.
"Also, bigger and more expensive dwellings (especially expensive apartments) mean the value of consents was still a healthy 16% up on April 2002. These data remain consistent with residential building activity stabilising at a high level," Byett says.
Macquarie Bank economists note that the trade weighted New Zealand dollar is actually exactly where the Reserve Bank predicted it would be in its March monetary policy statement. "The currency provides no justification for further monetary policy easing this week."
ANZ Bank economists also opt for the cautious approach.
"While risks are tilted to the downside at present, there remains considerable uncertainty about just how much growth (and hence resource and inflation pressures) will ease over the year ahead," it says.
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