Interest rate cut possible next month

By Phil Boeyen, ShareChat Business News Editor

Wednesday 12th September 2001

The possibility of a Reserve Bank interest rate cut may have increased after the US terrorist strikes.

Early Wednesday the bank assured the market that the events in the US would not disrupt New Zealand's payments system but added that in terms of effects on the world economy - and therefore on the stance of monetary policy - it is monitoring developments.

Deutsche Bank economist, Ulf Schoefisch, says he doubts the Reserve Bank will consider adjusting domestic policy settings until the economic and financial consequences of events in the US become somewhat clearer.

"However, the risk that the RBNZ undertakes further `insurance' easing, notwithstanding the current good performance of the New Zealand economy, has clearly increased, with some risk that this may happen as early as the 3 October interim review."

Statistics New Zealand released data Wednesday showing the total merchandise export and import price indexes both rose in the June 2001 quarter.

It says the depreciation of the New Zealand dollar, as measured by the trade-weighted index which fell 1.5% in the June 2001 quarter, contributed to the increases in export and import prices.

Moving against the trend were lower forestry product and fruit and vegetable export prices.

Deutsche Bank says the data confirmed the continuation of external price pressure during the second quarter of this year.

"However, going forward, both export and import prices should moderate, due to the firming of the NZD and the effect of continued global weakness on commodity prices. Some moderation in world prices for New Zealand's export commodities has already been observed over the past few months," says Mr Schoefisch.

"Consistent with weaker commodity prices, we forecast a fall of the terms of trade over the remainder of this year, which will moderate the demand stimulus the New Zealand economy has received from external sector income over the past year.

"Further out, growth prospects have become more uncertain in the light of the events today in the United States. Should the terrorism attack have a lasting negative impact on confidence and spending - a clear risk - the economic slowdown in the US will be more drawn out than initially expected."

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