Rate cut unlikely
It is looking far less likely that the Reserve Bank will cut interest rates on Thursday.
Tuesday, September 2nd 2003, 10:45PM
by Jenny Ruth
Certainly, the latest Reuters poll of 15 economists shows nobody is expecting a further cut this time around and that eight of them think we’re already at the end of the cutting cycle.
The other seven still think the Reserve Bank will cut its official cash rate (OCR) from the current 5% to 4.75% by the end of the year.
This is at odds with the wholesale interest rate market which is indicating that the next move in the OCR will be up, not down. The September 90-day bank bill futures were trading at 5.14% on Friday – the contract closes on 10 September, nearly a week after the central bank’s decision next week.
The December 90-day bank bill futures are trading at 5.17%, indicating investors don’t think there will be any change in the OCR before the end of the year. But the March and June futures contracts are suggesting the Reserve Bank will lift the OCR twice to 5.5% by the middle of next year.
"You would normally go with the market because that’s where people are putting their money, not their reputations," says one market observer.
However, ANZ Bank’s economists think the market "may be jumping the gun a little." They expect the OCR to stay at 5% through to the middle of 2004, citing low unemployment and continued employment growth, strong retail sales and the buoyant housing market coupled with abating negative news such as the impact of the SARS virus.
The change in the central bank’s agreement with the government from the previous "hard" zero to 3% inflation target to achieving the same result over the medium term "suggests that the Reserve Bank may take longer to reverse course" than was the case under previous governor Don Brash.
National Bank senior economist Cameron Bagrie is among those who think there might be another rate cut because the inflation outlook is benign, although he rates this as a 50:50 call.
"The economy may be being sold short by keeping the OCR unnecessarily high and the economic risk profile remains tilted towards the downside," Bagrie says. He expects inflation will stay below 2% over the coming year.
He also thinks the financial markets have it wrong. "An aggressive statement or pre-emptive tightening profile is not warranted, even though conditions are more favourable than signalled in June."
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