Economists differ on which way the OCR will go

After its uncharacteristically bold move in cutting rates two weeks ago, the Reserve Bank returned to its cautious approach and left interest rates unchanged today.

As expected, Reserve Bank governor Don Brash cites the "highly uncertain" outlook for the world economy and its unknown impact on New Zealand’s economy and inflation.

The official cash rate (OCR) was left unchanged at 5.25%.

"It is clear that the global economic outlook has deteriorated since the awful events of 11 September. We will inevitably feel some backwash from that, although our own economy appears to have been at least as robust before the attacks as we had previously expected," Brash says.

Figures last week showed the economy expanded 2% in the June quarter, way above economists' expectations of 1.4% growth.

"Our decision to cut the OCR by 50 basis points two weeks ago was a precautionary move that recognised the inevitable adverse effect and the likely impact on confidence. But how large those effects will be, and how long they will last, remains unclear,’’ Brash says.

Brash’s statement comes within hours of the US Federal Reserve cutting its benchmark interest rate by 50 basis points to 2.5%, its lowest level since the 1962 Cuban missile crisis. The Fed has cut the rate a full percentage point since September 11.

The Fed also talked about "significantly heightened uncertainty."

Brash’s statement today "reinforces that he saw the 50 basis points cut last month as an insurance premium and he doesn’t want to pay any more," says Peter Cavanaugh (pictured), associate director at Bancorp Treasury Services.

"New Zealand’s strong growth in the June quarter and the ongoing boost to the primary sector from the low currency will be enough for him to hesitate," Cavanaugh says.

New Zealand markets were unmoved after Brash’s statement, the 90-day bank bills unchanged from late yesterday at 5.27% and the December bank bill futures unchanged at 5.21%. That implies no further rate cuts this year, even though a number of economists are forecasting at least a further 25 basis point cut.

Bank of New Zealand bond dealer Baden Carter says the market interpreted the statement’s tone as being neutral to "at the margin, slightly on the hawkish side. There’s probably a slant towards the economy’s looking good scenario," he says.

Deutsche Bank economist Darren Gibbs, who notes that "we have a reputation of being reasonably hawkish," is still calling for a 25 basis point cut in November and interprets today’s statement as leaving the door open for that.

"The global outlook has deteriorated so markedly,’’ he says. When the Reserve Bank prepares its more considered view of the economy for the next monetary policy statement "it will come up with an economic outlook that’s quite a bit weaker than was previously the case."

The US market is already pricing in a further 25 basis point cut and Deutsche Bank is forecasting a further 50 points.

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