Economists looking for a kick start

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Economists are expecting Reserve Bank governor Don Brash to cut the official cash rate again by at least 25 basis points on Wednesday when he releases the central bank’s latest monetary policy statement.

Monday, May 14th 2001, 2:48PM

by Jenny Ruth

That would bring the OCR down from 6% to 5.75%.

WestpacTrust and National Bank are hanging out for more, saying a 50 point cut is needed.

"We’ve been pretty disappointed with the lacklustre interest rate sensitive side of the economy. We were expecting more domestic spending momentum that we’re seeing," says WestpacTrust chief economist and former Reserve Bank chief economist Adrian Orr.

While the New Zealand economy continues to be out of sync with the rest of the world, growing while global growth is contracting, the Reserve Bank still has a window of opportunity to kick start the domestic side of the economy before the global contraction starts to weigh down the export sector, Orr says.

National Bank chief economist Brendan O’Donovan is of a similar view and says a 50 point cut is needed to resuscitate flagging business confidence.

He notes that domestic price and cost pressures are subdued and that the prospects for world growth are also considerably weaker than the Reserve Bank was expecting in March.

Nevertheless, there’s still a big risk that Brash will maintain his previous cautious stance and cut only 25 points, O’Donovan says. "It comes down to a should and a will argument," he says.

If Brash does opt for only 25 points, it will mean an even bigger difference between New Zealand interest rates and global rates. While both our Reserve Bank and the US Federal Reserve started this year with their benchmark rates at 6.5%, the Fed has cut its rate to 4.5%. Next Wednesday morning our time, the Fed is expected to cut its rate to just 4%.

ANZ Bank takes the more mainstream view that Brash should only cut by 25 points, citing domestic inflation risks. It points to last weeks figures showing the unemployment rate fell to 5.4% in the March quarter, its lowest level since June 1988.

While the decline was due to a decline in the number of people participating in the labour market, the participation rate at 65.6% is still high by historical comparisons, says ANZ Bank economist David Drage.

And while employment was flat in the March quarter, the 0.8% rise in full-time employment and 2.5% in part time employment still nets out at 0.3% growth in full-time job equivalents, he says.

"We still think the Reserve Bank will cut, given global growth concerns, but it (the employment data) will reinforce a lot of the concerns the bank voiced in April," Drage says.

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