50 pt rate cut predicted

Reserve Bank governor Alan Bollard will probably cut interest rates again on Thursday despite tentative signs improving global sentiment and at least partly to offset the rising New Zealand dollar.

Sunday, April 26th 2009, 9:05PM

by Jenny Ruth

Reserve Bank governor Alan Bollard will probably cut interest rates again on Thursday despite tentative signs improving global sentiment and at least partly to offset the rising New Zealand dollar.

The official cash rate (OCR) currently stands at 3% and he has slashed it from 8.25% since July last year and the impact of the global credit crunch and the scope of the world-wide recession became apparent.

Of the 10 economists surveyed by goodreturns.co.nz, nine are forecasting a 50 basis point cut while Darren Gibbs at Deutsche Bank is picking a 25 point cut to 2.75% even though he says no cut is necessary.

"There is now already sufficient monetary and fiscal policy easing in the pipeline to return the economy to positive growth by year-end," Gibbs says. But since the market is expecting a cut, Bollard won't want to disappoint, he says.

Jane Turner at ASB Bank says the strengthening New Zealand dollar is threatening the expected economic recovery. And despite "green shoots" sprouting up, such as signs the US housing market is no longer in free fall, forecasts for world growth continue to be revised down.

The IMF, for example, not only downgraded its growth expectations for 2009 but also is expecting a much slower recovery in 2010, she says.

Westpac chief economist Brendan O'Donovan agrees: concensus forecasts for growth in our major trading partners are now negative 2.2% compared with the Reserve Bank's negative 1.8% forecast in March, he says.

O'Donovan also thinks Bollard will have to strengthen his commitment to keeping rates low for an extended period in order to keep long-term rates under control.

Longer-term mortgage rates have kicked upwards since late March. Five-year fixed rates offered by the major banks, for example, have jumped from about 6.6% to the 7.6% Westpac is now offering. The increase was significant enough for Bollard to put out a statement in early April saying the rise was "unwarranted and inconsistent with the monetary policy outlook."

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