Markets still pricing in interest rate cut

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Reserve Bank governor Alan Bollard will probably keep interest rates on hold this Thursday although financial markets are still pricing in a 20% chance of a rate cut.

Sunday, June 10th 2012, 9:17PM

by Jenny Ruth

Financial market pricing is extremely volatile - early last week, the markets had priced in at least two rate cuts and probably three before year's end but, on the back of stronger than expected economic growth numbers and employment data in Australia and despite disappointing domestic data lately, they're now pricing in a single cut in September with the possibility of another in the December quarter.

Only one economist, Gareth Kiernan at Infometrics, is predicting a cut in Bollard's official cash rate (OCR) from 2.5%0 to 2.25% and he rates that a 55% chance.

"It's certainly a line call, but there's still enough reason if they want to cut," Kiernan says, citing falling commodity prices, tame inflation and economic turmoil globally.

All 12 of the other economists www.goodreturns.co.nz surveyed are predicting Bollard will keep the OCR on hold and his next move will be to hike it 25 basis points to 2.75%, nine of them forecasting it will come in March next year and the other three in June next year. Kiernan is also expecting a hike in June next year.

Peter Cavanaugh at Bancorp Treasury Services says while commodity prices have fallen, there's been a small rebound lately, the trade-weighted measure of the currency has dropped 5% since Bollard's last statement and fixed-rate mortgage rates have tumbled recently, even though the OCR has remained unchanged.

"What the Reserve Bank really wanted was to generate a credible threat of an OCR cut, which it has done brilliantly," Cavanaugh says.

Darren Gibbs at Deutsche Bank says while a "respectable" case for an OCR cut can be made, "Dr Bollard's past reluctance to consider cutting the OCR below present levels, in part for fear of triggering a renewed credit boom (especially in housing) ... the hurdle to cut the OCR further is high and has probably not yet been cleared."

Gibbs is expecting Bollard to reiterate his "low rates for longer" approach but that he may open the door to a modest OCR cut, "should the economy seem likely to continue to disappoint."

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