Bollard to cut rates again

Reserve Bank governor Alan Bollard will likely cut interest rates again on Thursday amid the intensifying global recession with the only debate being by how much.

Friday, March 6th 2009, 2:00PM

by Jenny Ruth

Of the 11 economists Good Returns surveyed, seven are now expecting a cut in the official cash rate (OCR) from 3.5% to 3% while the other four are still expecting a cut to 2.5%.

The Reserve Bank of Australia’s (RBA) decision to leave rates unchanged earlier this month was a factor in a number of economists pulling back their forecasts.

Craig Ebert at Bank of New Zealand, which has pulled back its expectations to a 50 basis point cut from 75 points previously, says some of the domestic indicators haven’t been quite as bad as they might have been.

"The RBA is relevant but only in its indirect message. We’re not in collapse mode down under," Ebert says. While New Zealand’s trade figures, for example, showed exports up by 3% in January, a tepid increase despite the sharply lower currency, that nowhere near as bas as Japan’s 45.7% drop in exports in January.

Ebert says Bollard may want to reserve some fire power for later – when unemployment numbers start climbing Bollard will probably want to be seen to be doing something.

Brendan O’Donovan, chief economist at Westpac, who is still picking 100 basis points, says it will come down to Bollard’s strategy. "So far, he’s delivered cuts in very big licks and generally ahead of market expectations. He’s responded in full measure to the changing environment."

Bollard has cut the OCR from 8.25% since July last year, the last cut being 150 points in January from 5%.

Shamubeel Eaqub, an economist at Goldman Sachs JB Were, who is picking a 50 point cut, says Bollard might be concerned about New Zealand interest rates getting too much lower than Australia’s – its OCR is currently 3.25% -- and the likely depressing effect that would have on the exchange rate.

Eaqub says Bollard shouldn’t worry too much about that: "part of the re-balancing the economy requires is a lower dollar."

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