Survey shows 100 pt cut highly likely

• Tweet

Reserve Bank governor Alan Bollard is almost universally expected to slash rates again in December by at least the same magnitude as October’s unprecedented cut reflecting the increasingly gloomy global growth outlook and the collapse of inflation domestically.

Friday, November 21st 2008, 6:14AM

by Jenny Ruth

All nine economists surveyed by www.goodreturns.co.nz now expect Bollard will cut his official cash rate (OCR) from 6.50% to 5.50%. In October, he cut the OCR from 7.50%, the biggest move since the central bank introduced the measure in March 1999.

"The central bank has a very clear mandate: to keep inflation in a zero to 3% bank. The key think that’s happening is inflation is collapsing and that gives them the green light to slash rates," says Stephen Toplis, an economist at Bank of New Zealand.

"Our own forecasts now have zero inflation over the next six months."

Like Hayden Atkins at Macquarie Bank, Toplis is now wondering whether Bollard might cut the OCR by 150 basis points to just 5%.

Atkins says the US, European and British economies are in deep recession, growth in the developing world has stalled and domestic growth is already weak.

"The housing market has not responded to lower fixed mortgages since early 2008 with activity severely depressed. Non-residential construction activity is also set to slow dramatically, given the effects of the credit crunch," Atkins says.

Collapsing dairy prices are also posing "a huge risk to growth. This means that the current recession is now likely to be magnified into something much worse.

Robin Clements at UBS New Zealand had previously been picking a 75 basis point cut but now believes a cut of at least 100 points is inevitable, if only to avoid disappointing financial markets which already have a 100 point cut fully priced in.

"It’s not a good time to disappoint the market," Clements says. Only a few weeks ago, concensus expectations were for a 50 basis point cut but now economists are starting to think a 150 point cut might be on the cards, he says.

Until the global credit crunch took a severe turn for the worse in September, 25 basis point changes to the OCR were the norm.

« Short, yes, but how short?

OCR cut to 7.5% »

Commenting is closed

 

Printable version

Email to a friend