Economists divided on next move for interest rates

Economists are more divided than they've been since Reserve Bank governor Alan Bollard began cutting rates in July last year about what his next move should be.

Sunday, June 7th 2009, 9:29PM

by Jenny Ruth

On the one hand are signs the global economy is stabilising, the domestic housing market has rebounded and net immigration figures are climbing again.

On the other hand, retail sales remain very depressed - retail sales volumes fell 2.9% in the March quarter, Fonterra's expected milk payments have dropped sharply and the New Zealand dollar has soared well above the central bank's expectations. Longer-term interest rates are also creeping up.

On April 30, Bollard cut his official cash rate (OCR) from 3% to 2.5%, his seventh successive cut since July 2008 when the OCR stood at 8.25%.

Of the 12 economists surveyed by GoodReturns last week, five are expecting no change in the OCR this week, five are expecting a 25 basis point cut to 2.25% and two are expecting a 50 point cut to 2%.

Annette Beacher at TD Securities is one of the latter, although she rates a 50 point cut only a 55% probability. She is forecasting the economy will shrink further following four consecutive quarters of negative growth through 2008 and points out our largest trading partner, Australia, is in economic decline.

She also thinks Bollard "must be uncomfortable with the relentless squeezing of financial conditions" caused by the rising New Zealand dollar.

"A decisive move would have a better chance of impacting market pricing and keeping a lid on the New Zealand dollar. At some stage someone has to mention that exporters are doing it tough."

Robin Clements at UBS New Zealand is among those calling for a 25 point cut but says the only reason Bollard might not go for a 50 point cut is he won't "want to get to zero too quickly."

Clements says if Bollard doesn't cut, the implication will be he thinks he's cut enough. Since the market's natural inclination is anticipate Bollard's next move, it will start focusing on when he will hike rates and how fast.

"It's only going to accelerate the trend that's underway already," Clements says.

Dominick Stephens at Westpac is at the other end of the spectrum, expecting no change. While he thinks the "green shoots," such as the housing market's recovery and the rise in some of New Zealand's commodity prices, will soon fade, "nevertheless, the green shoots are there and you can't really make monetary policy against the grain."

Stephens is of the view Bollard would be better saving his firepower for later.

« TSB grows profits and mortgage book; HSBC's profit more than doubles

MPs slam banks over interest rates »

Special Offers