Bollard may not cut as deep as RBA holds interest rates

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Reserve Bank of New Zealand Governor Alan Bollard may not cut the official cash rate by as much as expected next week after his counterpart in Australia held its benchmark rate unchanged at 3.25% even as that economy contracted.

Thursday, March 5th 2009, 12:54PM

by Paul McBeth

Economists have wound back their predictions for Bollard’s rate cut on March 12 to a 50 basis point reduction, according to the consensus of forecasts compiled by Reuters this week. They were previously tipping an average 75 basis point cut in the OCR.

Bollard embarked on the steepest-ever easing cycle last July, betting inflation would evaporate as the economy shrank and the world’s financial markets stumbled. Australia’s central bank has slashed its rate by 4 percentage points since September as the global economic slump reached the South Pacific.

“Fifty basis points is looking more likely,” said Jason Wong, head of investment strategy for AMP Capital, which manages around $11 billion of funds in New Zealand. A fall below Australian rates “is unusual in recent times and might put downward pressure on the currency,” he said. Still, “a move from 25 points over to 25 under is not that great.”

The pause by the Australian central bank may weigh on Bollard’s decision as New Zealand’s economy tends to lag behind the rest of the world. There is still a chance he will move to the perceived goal of 2% to 2.5% swiftly, said Shamubeel Eaqub, economist at GoldmanSachs JBWere. “The need for policy relief in New Zealand is more intense, and the RBA’s decision should be seen as an exogenous factor.”

Westpac may reassess its forecast 100 point cut, as consensus of a 50 to 75 point grows, said currency strategist Imre Speizer. “There are mixed signals from the RBA, and it is possible Bollard may need to hold back,” he said.

Paul is a staff writer for Good Returns based in Wellington.

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