Bollard surprises with a rate cut
Thursday, April 24th 2003, 10:52AM
The surprise move pushed wholesale interest rates down about 20 basis points across the board and will pave the way to further cuts in mortgage interest rates.
Bollard had outlined in January a number of conditions which had to be met, including the New Zealand dollar either remaining unchanged or appreciating further and evidence of reduced pressure on medium term inflation.
While most economists didn’t think these conditions had been met yet, Bollard says they have been. David Drage, chief economist at ANZ Bank was one of those who thought they hadn’t.
"In both January and March, they (Reserve Bank officials) were adamant that they needed to see evidence," Drage says. "They appear to have moved to making a judgment call on the basis of intensifying downside risks."
While capacity utilisation, the degree to which businesses are using their plant and equipment, has eased slightly, it is still running at historically high levels and labour shortages have actually increased, Drage says.
According to Bollard, "the available data suggest that growth in the New Zealand economy is slowing as we projected" in March."
The weak global economy is being reflected in softer activity in the import/export sector. That is expected to feed through into the domestic economy as exporters incomes decline, even though the domestic economy currently remains relatively robust, especially in the housing market, Bollard says.
"With the passage of time, we are now more confident that inflationary pressures will ease, which is the basis of today's decision," Bollard says, but cautions against people interpreting that as the central bank having a more pessimistic view of the economy than previously.
Bollard also cites drought in some parts of the country, potential electricity shortages and the SARS virus as adding additional downside risks, although at the moment he doesn’t expect much enduring impact.
He warns that any further rate cuts depend on further evidence suggesting inflation will settle "comfortably" within his zero to 3% target over the medium term.
Both Drage and Annette Beacher, economist at Citigroup, expect today’s move is likely to lead to a further rate cut later this year – the wholesale market has already priced this in.
Beacher says she needs to assess the cash rate path going forward, but "it is difficult to believe that the Reserve Bank will only stop at one rate cut if these downside risks continue to unfold."
Anthony Byett, chief economist at ASB Bank, was one of the few to anticipate today’s move on the basis that he didn’t expect much to change between now and June. Since the central bank had signalled a cut, it might as well be today, he says.
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