Another humungous rate cut expected

Economists are expecting another humungous cut in the official cash rate (OCR) on Thursday as the economic outlook continues to get murkier.

Sunday, January 25th 2009, 6:35PM

by Jenny Ruth

It used to be that a 50 basis point OCR cut, as Reserve Bank governor Alan Bollard implemented in September, was regarded as a huge move but Bollard followed September’s cut with a 100 point cut in October and a 150 point cut in December, taking the OCR to 5%.

As of Friday, 13 of 15 economists were expecting a 100 basis point cut to 4% this time around but two, Maquarie’s and Westpac chief economist Brendan O’Donovan were calling for a 150 point cut.

Tellingly, wholesale market pricing was moving towards a 150 point cut. O’Donovan says the market has been pretty illiquid but was pricing in 115 basis points by late Friday.

O’Donovan says the data flow since the central bank’s last move has shown a much weaker economy. "The deterioration in the data has been more dramatic than between October and December. We think the changes in data are worth about 170 basis points in terms of the Reserve Bank’s model – 150 is certainly justifiable," he says.

Both the outlook for the global economy and New Zealand’s is significantly worse now than in September and domestic business confidence has dived, along with the prices of our commodities while credit markets remain tight and the housing market subdued.

Robin Clements, an economist at UBS New Zealand, says Thursday’s cut is unlikely to be less than 100 basis points because Bollard won’t want to disappoint the market.

Jane Turner, an economist at ASB Bank, says she expects Bollard to cut by at least 100 points and the OCR is likely to go as low as 3% this year because the Reserve Bank’s December economic forecasts are looking increasingly optimistic.

"However, we are getting close to the point where lower interest rates will start to lose potency and the Reserve Bank needs to start thinking of alternative methods to deliver stimulus, just in case they are needed," Turner says.

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