Bollard expected to cut rates on Thursday

Reserve Bank governor Allan Bollard is widely expected to cut interest rates again on Thursday with the inflation outlook having improved but the outlook for global economic growth deteriorating.

Monday, September 8th 2008, 9:35AM

by Jenny Ruth

All 10 of the economists surveyed by GoodReturns expect Bollard to cut his official cash rate (OCR) from 8% to 7.75%.

Darren Gibbs at Deutsche Bank says the market has already priced in a rate cut this week and then some. "If they (the central bank) don’t go 25 (basis points), we’re going to get a massive sell-off in wholesale rates and I don’t think they want that," Gibbs says.

Jane Turner at ASB Bank says the slowdown in the New Zealand economy "is well and truly entrenched," and the Reserve Bank will still be concerned about global funding costs in the wake of the credit crisis. But while the inflation outlook has improved, it "remains uncomfortably high and the Reserve Bank’s delicate balancing act is not yet over."

One factor in that balancing act is the steep fall in the New Zealand dollar. When Bollard cut the OCR in mid-July, the first cut since July 2003, he signalled further cuts, provided there was "no excessive exchange rate depreciation."

Immediately the July OCR cut, the New Zealand dollar was trading about 75 US cents and it ended last week just below 67 cents. However, economists don’t believe that’s sufficient to derail further cuts.

Craig Ebert at Bank of New Zealand says while the economy is showing signs of stabilizing, the indicators are still very weak. A recovery is by no means assured and a "double-dip" scenario can’t be ruled out.

Ebert is expecting Bollard to highlight the world economy, which is "looking quite shaky at the moment," and its potential impact on New Zealand’s economy.

But he is also warning against expectations of retail and mortgage rates falling much from current levels because they already reflect expectations of further OCR cuts.

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