Odds on for a rate cut

Pricing in financial markets is saying it’s a pretty safe bet the Reserve Bank will follow the lead of offshore central banks and cut its official cash rate (OCR) on Wednesday and the odds on a further cut in January are improving all the time.

In quick succession last week, the US Federal Reserve cut its key interest rates by half a percentage point to 2%, the European Central Bank cut its rate by the same amount to 3.25% and the Bank of England also cut its rate by 50 basis points to 4%.

Our Reserve Bank is expected to cut the OCR from 5.25% to 4.75% this week.

"The market is fully pricing over a 90% chance of a 50 basis point cut, with a 70% chance of a further 25 basis point cut early in the new year,’’ says Darren Gibbs, senior economist at Deutsche Bank.

With such a long gap between Wednesday’s monetary policy statement and the next formal OCR review date on 23 January, Gibbs says he will be surprised if the central bank disappoints the market this week.

"We think that a 25 basis point cut would lead to a sell-off in debt markets and would likely have negative implications for the New Zealand dollar, at least over the near term,’’ he says.

It will be the second time the Reserve Bank has cut rates since the 11 September terrorist attacks. It cut the OCR from 5.75% on 19 September.

And it is the increasingly gloomy outlook for the global economy which has the market so convinced further rate cutting is necessary.

"New Zealand is caught in the gravitational pull of an international economy at its weakest in 25 years,’’ says the National Bank.

"Plunging business confidence and a wave of job cuts have brought global growth to a standstill with Japan already in recession, the US heading the same way and Europe teetering on the brink.’’

Recent domestic data, while by no means depicting an economy in trouble, also suggests recent brisk growth is moderating, lessening the threat of inflation getting out of hand.

Bank of New Zealand says the slowing of real retail sales growth to 0.6% in the September quarter compared with the June quarter’s 1.2% growth and the March quarter’s 1.5% is "consistent with a share softening in the rate of household spending.’’ Excluding the automotive sector, sales with up just 0.2% in the latest quarter, it notes.

It is now forecasting retail sales growth of just 0.25% this quarter and a flat result in the first quarter next year. ``This is based on the premise that consumer confidence is low3 and likely to weaken further short term,’’ BNZ says.

ANZ Bank’s job advertisement figures also suggest a weakening labour market. Job ads in October fell 3% in October from a month earlier and were down 4.4% on a year earlier.

The bank notes this is the third consecutive monthly decline in job ads and "may be a warning that the recovery seen in the domestic economy over the past six months is faltering."

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