Bollard to cut rates again: economists debate the magnitude

Economists are expecting a worsening global outlook will see Reserve Bank governor Alan Bollard slash rates again in March, the only question being by how much.

Monday, February 23rd 2009, 10:01AM

by Jenny Ruth

In late January, Bollard cut his official cash rate (OCR) from 5% to 3.5%, saying the global economy is now in recession. He has progressively cut the OCR from 8.25% since July last year.

Of the 11 economists Good Returns surveyed, four are now expecting a 50 basis point cut, three a 75 point cut and four a 100 point cut to 2.5%.

Deutsche Bank economist Darren Gibbs says a speech by Reserve Bank of Australia governor Glenn Stevens gave to the Australian parliament’s economics committee on Friday hasn’t changed his firm’s view the RBA is likely to leave rates unchanged at its next review on March 3.

If that’s the case, Bollard is unlikely to cut more than 50 points, Gibbs says.

"We’re clearly not as resilient as the Australian economy and rate do need to be down further. Our policy needs to be a bit more aggressive," he says.

But, given how much Bollard has already cut, Gibbs is starting to worry unnaturally low interest rates may start to encourage activity which will be unsustainable once rates normalise again – which is what happened in the US and is partly to blame for the current global credit crunch.

But both ASB Bank economist Jane Turner and Westpac economist Doug Steel, who are both picking a 100 point cut, say the latest concensus forecasts for global growth have been substantially revised down yet again.

Westpac has only just changed its forecast from a 50 point cut to a 100 point one and Steel says the pace of those downgrades is increasing.

Turner agrees: "The backdrop is deteriorating quite sharply."

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