Economists divided on OCR announcement

Economists are divided on whether Reserve Bank governor Alan Bollard will keep interest rates on hold, make a small cut or a big cut in response to the Christchurch earthquake and the still sluggish economy.

Sunday, March 6th 2011, 10:51PM

by Jenny Ruth

Pressure is certainly mounting on Bollard to cut with even Prime Minister John Key saying he expects a cut.

Bollard has held the official cash rate (OCR) steady at 3% since July last year. Some are picking he will slice as much as 50 basis points off it to 2.5% while others think a 25 point cut would be sufficient to bolster confidence.

At the end of last week, the market was taking an each way bet by pricing in about 33 points. A number of banks had also cut their six-month and one-year fixed mortgage rates.

"At a time of national crisis, when the underlying economy is already proving frustratingly weak, a rate cut (of 50 points) would potentially be very helpful to the recovery of the economy," says Jane Turner at ASB Bank.

Darren Gibbs at Deutsche Bank also reckons a 50 point cut is warranted. "Whilst some commentators have called for a 25 basis point reduction in the OCR, and some for no reduction at all, in our view, set against government estimates of a $15 billion reduction in GDP over the next four years, together with the $15 billion of damage to land, property and infrastructure, we think anything less than a 50 basis points reduction would be a feeble contribution," he says.

Bank of New Zealand chief economist Tony Alexander isn't so sure of a 50 point cut but does think Bollard will cut by at least 25 points.

"The economy may have been back in recession and getting worse before the earthquake removed all doubt," Alexander says.

Annette Beacher at TD Securities, however, says interest rates are already very accommodative by historical standards and that Bollard should simply hold rates and say he won't be raising them any time soon.

"Dropping the tightening bias and leaving the door open for lower cash rates should the economy stumble further could give households the push to scale back outsized precautionary savings and return to measured spending growth," Beacher says.

If Bollard does cut, "the markets are likely to revert to 'the next move is up' ... potentially negating any benefit," she argues.

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