Lower mortgage rates likely this year but not yet

Most economists are expecting Reserve Bank governor Don Brash to keep interest rates steady on Wednesday when he reviews the official cash rate (OCR), even though the economy didn't grow last quarter.

Friday, June 29th 2001, 8:07PM

by Jenny Ruth

Most economists are expecting Reserve Bank governor Don Brash to keep interest rates steady next Wednesday when he reviews the official cash rate (OCR), even in the face of Friday’s shocking figures showing the economy didn’t grow at all in the March quarter.

On average, economists had expected 0.6% or 0.7% growth. The Reserve Bank’s own expectation was for 0.5% growth.

Nevertheless, the concensus is growing that the figures make it more likely the central bank will cut rates when it releases its next monetary policy statement on 15 August.

Both National Bank and WestpacTrust, which have both frequently said the Reserve Bank could and should be more aggressive about cutting rates, say the weak economy adds substance to their views.

National Bank is going as far as to predict a 25 basis point cut in the OCR to 5.5% next Wednesday, but economist Cameron Bagrie acknowledges his bank is in the minority.

"Is there any other country in the western world where current economic conditions wouldn’t see a more aggressive central bank," Bagrie says.

Certainly, the outlook for the US economy was sufficiently weak that the Federal Reserve cut its benchmark rate 25 basis points to 3.75%. Both the Fed and New Zealand’s central bank began this year with their benchmark rates at 6.5%.

WestpacTrust says while the weak economy means a rate cut next week can’t be ruled out, it expects the Reserve Bank to remain cautious. Signs of a pickup in house sales, building consents and consumer confidence suggest the central bank won’t be in any hurry, it says.

ANZ Bank points out that the growth rates for each of the three previous quarters were revised upwards so that the annual rate of 2.5% is actually slightly higher than the average market expectation and exactly in line with the central bank’s expectations.

As well as the signs of recent strength WestpacTrust notes, ANZ Bank also points to recent strong retail sales figures as being encouraging.

Still, ANZ Bank also sees the risks for interest rates are still on the downside "and will continue to do so until the world economy stabilises and starts to recover and the recent signs of increasing momentum in the domestic economy become more widespread."

Bank of New Zealand is expecting a rate cut in August, but it sees global growth concerns as playing a bigger role than events in the domestic economy.

"We are less upbeat than the Fed of a US pickup and, probably more importantly, activity in East Asia and Europe is decelerating," BNZ says.

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