Reserve Bank treads softly

There were no surprises from Reserve Bank governor Alan Bollard this time as he has cut the official cash rate (OCR) from 5.5% to 5.25%, in line with most economists’ expectations.

In announcing his decision, Bollard cited softening inflation pressures, evidence of slowing growth and the need for "protection for the economy against downside influences."

Some economists had thought there was a chance the OCR would be cut to 5%.

While Anthony Byett, chief economist at ASB Bank, had picked the 25 basis point cut the central bank delivered, he says that Bollard’s latest monetary policy statement does focus very much on the downside risks to the economy, holding out the promise of further rate cuts to come.

The three major risks are that fragile business and consumer confidence will exaggerate the downturn and delay the recovery, that the New Zealand dollar will continue rising, hurting exporters’ returns and that the global economy will again fail to produce an expected recovery.

Nevertheless, the wholesale interest rates market was somewhat disappointed by Bollard’s decision. The 90-day bank bills, from which floating rate mortgages are set, blipped up from 5.20% before the statement to 5.24% shortly afterwards while the September 90-day bank bill futures rose from an implied 5.17% rate to 5.23%.

"The market was factoring in three rate cuts in pretty quick order and has been mildly disappointed," says Brendan O’Donovan, chief economist at Westpac.
While today’s statement sees the risks to the economy mainly on the downside and signalled a further 25 point cut is likely in July, it also served to put a floor under future rate cut expectations, he says.

Ulf Schoefish, chief economist at Deutsche Bank, who had thought a 50 point cut was warranted today, still insists the arguments in favour of a bigger cut are still valid.

"Obviously, the Reserve Bank was a bit more cautious. I sometimes think the RBNZ is a bit inward looking," Schoefish says. While the New Zealand economy previously stood out as being very strong against a backdrop of a weak global economy, that is no longer the case.

"We’re seeing all kinds of weakness in many sectors and rates now aren’t easing fast enough," he says. "There’s always the point of the (strong) housing market, but at this point that’s a blessing. That’s the only thing that’s still ticking along."

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