Economists take note of interest rate signal

By NZPA

Thursday 23rd January 2003

Economists were unsurprised by the Reserve Bank's decision this morning to leave the official cash rate unchanged at 5.75 percent.

However, they took note of the bank's signal of a possible interest rate cut later in the year if evidence emerged that New Zealand's rising currency was dampening down the inflationary tendencies of its strong domestic economy.

"It's really summed up by the Reserve Bank's contention that the balance of risks has shifted," said David Drage, chief economist at ANZ Bank.

"We note though that while foreshadowing the possibility of lower rates later in the year, it's a very heavily caveated possibility and that would rely very heavily on actual evidence of lower inflation pressures. For the time being the Reserve Bank has recognised that those inflation pressures remain relatively intense."

"It was perhaps a little more tilted towards the possibility of lower rates than we had expected." Robin Clements, chief economist at UBS Warburg said that the bank had "revealed its hand", endorsing the idea that at some point later on in the year, the case for easing will be in place".

"But I think it was interesting that they made the comment that the domestic economy has been surprisingly strong still and that's where the risks are: that housing, labour market still spills over into inflation which might delay the easing day."

He said his forecast for an easing third quarter in September "still looks pretty good."

Bernard Doyle, a JBWere economist, said he was picking June to be the month for the first interest rate cut.

"I think March is a growing probability but if there was a move in March it would have to be driven by currency -- I would be very surprised if deteriorating growth outlook would drive that."

Stephen Toplis, head of market economics at the Bank of New Zealand, agreed.

"What is needed for that to now occur is some substantial evidence the domestic economy is softening."

It was clear, he said, the balance of risk in terms of future interest rates had shifted more towards an easing and away from neutral but it did not guarantee another move.

"We've been making the point for some time now that there's really a battle between two antagonists here: one is the deflationary forces of the rising exchange rate and the other is the inflationary forces of the rampant housing sector.

"Over the last few weeks, the rapid appreciation of the New Zealand dollar has tended to suggest that that's sort of winning the battle at the moment.

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