Rate cuts looking more distant

Nobody is expecting any change in the official cash rate (OCR) when Reserve Bank governor Alan Bollard releases his latest monetary policy statement on Thursday but most economists believe he will cut the rate at least once before year end.

Monday, June 5th 2006, 8:44PM

by Jenny Ruth

They expect the OCR will be cut from its current 7.25% level to 6.75% by then, but an increasing number are starting to wonder whether there will be any cuts this year.

A key influence in the past few weeks has been a sea-change in sentiment in the wholesale interest rates market. From previously anticipating a rate cut earlier than the economists were forecasting, the market is no longer expecting a rate cut this year.

The December 90-day bank bill futures were trading at the equivalent of 7.33% on Friday while the March 2007 futures were trading at 7.15%, suggesting a rate cut in January.

With the June 2007 bills trading at 6.90%, that suggests the market expects a further cut by a year’s time.

Bank of New Zealand economist Stephen Toplis worries that "stagflation," a period of stagnating economic growth couple with high inflation, is in prospect.

He says the growth indications in National Bank’s latest business outlook publication, which showed business pessimism at a net 31.3%, show "the growth indicators look far from impressive yet the inflation indicators are quite unsettling."

BNZ is now forecasting the first cut in the OCR won’t be until March 2007.

ASB Bank economist Daniel Wills agrees the inflation outlook is "uncomfortable."

He says the Reserve Bank is facing the possibility that inflation will linger above 3% for at least two consecutive years while growth is slowing.

"Every quarter that the inflation rate remains above the 3% mark, the higher the probability that higher inflation pressures become entrenched," he says.

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