Trading partner slump increases rate cut expectations

A major slump in expectations for the outlook of New Zealand’s major trading partners, coupled with benign domestic inflation figures, has convinced both economists and the market that the Reserve Bank will cut its official cash rate (OCR) by at least 25 basis points next month.

Tuesday, October 16th 2001, 10:44AM

by Jenny Ruth

Many economists are saying the outlook deterioration could be sufficient to warrant a 50 point cut.

For now, the market is putting its money on a 25 point cut from the current 5.25% OCR, the December 90-day bank bill futures trading at 5.01%.

The October edition of Consensus Forecasts, a 14-country index which the Reserve Bank is known to watch carefully, indicates average trade-weighted trading partner growth of 1.3% in 2001, down from 1.8% previously. For 2002, it suggests 2.1% growth, down from 3%.

Consumer prices rose 0.6% in the September quarter for an annual rate of 2.4%, exactly on market expectations and comfortably back within the Reserve Banks zero to 3% target, giving it one less thing to worry about.

Deutsche Bank economist Darren.Gibbs says since the July edition of Consensus Forecasts, the edition the Reserve Bank used in preparing its last monetary policy statement, the cumulative downward revision is "a staggering" 1.9 percentage points.

"If the Reserve Bank is to be consistent, it is difficult to see how it could not now conclude that the OCR needs to be set somewhat lower," Gibbs says. "We think a 25 point cut is close to a done deal." He rates the chances of a 50 point cut at about 35%.

Bank of New Zealand also thinks 25 points is "a virtual given and a strong case is building for 50 points (or even more) before too long." National Bank is taking a similar view.

WestpacTrust economist Nick Tuffley says the Consensus Forecasts have changed his bank’s view of what the Reserve Bank will do. It had been forecasting a 25 point cut but now expects 50.

"The world outlook is grimmer and we believe the Reserve Bank will acknowledge that," he says.

David Drage, chief economist at ANZ Bank, is more cautious, expecting only a 25 point cut.

He suggests that the central bank’s 50 basis point cut last month may well have been in anticipation of such a deterioration in the outlook. "I caution a little against getting too carried away," he says.

Peter Cavanaugh, associate director at Bancorp Treasury Services, agrees and says he prefers to put his bets on where the market is putting its money "and the market is pricing in 25 points."

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