Whopper rate cut coming: Economists

A majority of economists now expect a whopper of a rate cut when Reserve Bank governor Alan Bollard delivers his latest monetary policy statement on Thursday.

Sunday, November 30th 2008, 11:22PM

by Jenny Ruth

Since Bollard’s last review of his official cash rate (OCR) on October 23, when he cut the OCR from 7.5% to 6.5%, the biggest move since the central bank introduced the measure in March 1999, expectations of the next cut have been escalating.

A month ago, the majority expected a 50 basis point cut; less than two weeks ago, it was a 100 points; now, eight out of 15 economists are expecting a 150 point cut to 5%. At the end of last week, the market was taking an each way bet between 100 and 150 points by pricing in a 125-point cut.

Infometrics economist Chris Worthington is a lone hold-out for a 75 point cut, but concedes: "There’s a lot of risk we will be wrong, but you have to say 75 points isn’t conservative."

Worthington says he isn’t sure what’s driving other economists, except Bank of England set the scene in the first week of November by cutting its key rate 150 basis points to 3%, triple what the market had been expecting.

However, also in early November, the Reserve Bank of Australia cut its key rate by only 75 basis to 5.25%.

"I think it needs to be said there’s a fairly solid case for saying things are bad, but not panicking bad," Worthington says.

Westpac has an official call of 100 points, but economist Donna Purdue thinks the possibility of a bigger cut is increasing; pointing to figures released Friday showing housing consents in October at a record low.

"That number was pretty ugly. It certainly puts downside risks to our view of construction," Purdue says.

Deutsche Bank economist Darren Gibbs is firmly in the 150 basis point camp. "The global economic picture has changed so dramatically in the last few weeks; the global data has been just abysmal."

While other governments have been throwing squillions at the global banking crisis, New Zealand’s relatively high interest rates means it has the luxury of allowing monetary policy to do more of the work of easing pressure on the financial system, Gibbs says.

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