Economists expect 50 basis point OCR cut

ASB economist Jane Turner says the personal, economic and financial ramifications for the entire economy from the February 22 earthquake are becoming increasingly severe as more information comes to hand.

"At a time of national crisis, when the underlying economy is already proving frustratingly weak, a rate cut would potentially be very helpful to the recovery of the economy."

Turner says prior to the earthquake, the Reserve Bank had already flagged the possibility of an OCR decrease over this cycle if domestic conditions continued to deteriorate.

"This followed a raft of underwhelming data, which indicated economic activity stalled over the second half of 2010."

The Deutsche Bank says it sees little point in the small reduction the market has priced in and therefore it expects a 50 basis point cut to be made to provide greater assurance that the forecast recovery remains on track despite the tragic events in Christchurch.

"In our view it is clear that the Government must take the lead in responding to this disaster, but we think monetary policy can - and should - also play a small role."

The Deutsche Bank expects the Reserve Bank to also emphasise that it will remain focused on medium-term underlying inflation pressures.

It also expects there to be a reminder that policy will likely need to be tightened in due course as the economy eventually returns to trend, especially with the stimulatory rebuild in Christchurch now certain to be even greater in 2012 and beyond.

Comments from our readers

On 24 February 2011 at 1:43 pm Darcy Ungaro said:

Irrespective of the tragedies in Christchurch, due to the contraction of the economy in Q3 and very sheepish spending behavior, what the NZ economy needs is stimulus. I very strongly believe the OCR should NOT have increased when it did – it snuffed out the beginning of a recovery. My only question is if the OCR is reduced, will this really lead to a reduction on the variable rate home loans for consumers, given that some lenders are really having to compete for short term deposit etc.?

On 2 March 2011 at 2:28 pm Andy said:

Trends in housing demand always follow population growth and shifts. With a population move away from Christchurch, no amount of interest rate changes will encourage people to purchase here. For example; loading someone up with debt now just because they can afford it at 6% will put them in financial danger in 4 years if the rates increase to 8%. Conversely - where demand is high but housing stock is low (Blenheim for example) house prices will increase - regardless of interest rates. Interest rates do not encourage growth as much as population shifts. If Mr Bollard had seen that many years ago, he would not have had to shift the OCR so much, stifling the economy in the process. Supply and demand denotes price now, cost does not affect demand as it used to. As an example - the price of cigarettes has increased significantly over recent years, yet demand has hardly decreased. Once people are housed and the population growth is stabilised, industry and business will follow as day follows night. Stimulus is no good if there are no people to need the goods and services.

Economists expect 50 basis point OCR cut

ASB and the Deutsche Bank expect the Reserve Bank to deliver a 50 basis point cut in the Official Cash rate (OCR) to 2.50% at the March 10 meeting - if not sooner.

Thursday, February 24th 2011, 11:35AM 2 Comments

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