Rate cut picked for Thursday

The central bank has cut the OCR twice already since late April from 5.75% to 5.25%.
A Reuters poll of 15 economists shows all are expecting a cut with a 70% chance of it being 25 basis points and a 20% chance of it being 50 points. Eight of them expect a further rate cut at the next monetary policy statement on 4 September.

The market has already anticipated a 25 point cut this week with the 90-day bank bills trading at 5.07% on Friday. It is less certain about future cuts with both the September and December 90-day bank bill futures implying a 4.95% physical rate by those dates.

Deutsche Bank is the most aggressive in picking future rate cuts. Senior economist Darren Gibbs says his bank thinks that there are risks that if the Reserve Bank doesn't cut interest rates substantially further, the New Zealand dollar will rise far beyond its current relatively high rate and that that will put unnecessary pressure on exporters.

The currency's rise is being fueled by the large gap between New Zealand's interest rates and the rest of the world. In the world's biggest economy, the US, the Federal Reserve cut its key interest rate last month to just 1%.

The Reserve Bank is in something of a quandary because inflation in the "non-tradeables" part of the economy, which includes housing, is running at a 3.8% annual rate. "That's clearly not a low rate of inflation," Gibbs says.

But the overall inflation rate in the year ended June was just 1.5% because of double whammy of the high weak commodity prices and the high currency delivering lower earnings to farmers and other exporters.

"It really is a question of what the bank chooses to focus on," Gibbs says.

Anthony Byett, chief economist at ASB Bank thinks the central bank should probably cut the OCR 50 points this time around because of the currency's negative impact, but he guesses it will choose the more conservative 25 points.

The economy has already slowed and "the time has come for (Reserve Bank governor) Dr (Alan) Bollard to be more decisive," Byett says. Gross domestic product slowed to just 0.6% in the March quarter and was probably negative in the June quarter, he argues. And inflation is hardly a problem, having hit zero in the June quarter.

Bancorp Treasury Services is similarly worried about the high currency's impact and agues the logic of a 50 point cut. The central bank needs to recognise that New Zealand's comparatively high interest rates "will be a constant spur to the currency and therefore a nagging factor which works against its policy intentions."

Stephen Toplis at Bank of New Zealand is at the other end of the spectrum, saying only a 25 point cut is warranted.

"We're in no doubt that economic growth is slowing, but we think it's only slowing to be marginally below trend." The stimulus the central bank has already injected, coupled with the likelihood that the global economy is recovering, should mean a reasonable outlook for the domestic economy, Toplis says.

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