Bollard may not cut as deep as RBA holds interest rates

By Paul McBeth

Thursday 5th March 2009

Reserve Bank of New Zealand Governor Alan Bollard may not cut the official cash rate by as much as expected next week after his counterpart in Australia held its benchmark rate unchanged at 3.25% even as that economy contracted.

Economists have wound back their predictions for Bollard's rate cut on March 12 to a 50 basis point reduction, according to the consensus of forecasts compiled by Reuters this week. They were previously tipping an average 75 basis point cut in the OCR. Bollard embarked on the steepest-ever easing cycle last July, betting inflation would evaporate as the economy shrank and the world's financial markets stumbled. Australia's central bank has slashed its rate by four percentage points since September as the global economic slump reached the South Pacific.

"Fifty basis points is looking more likely," said Jason Wong, head of investment strategy for AMP Capital. A fall below Australian rates "is unusual in recent times and might put downward pressure on the currency," he said. Still, "a move from 25 points over to 25 under is not that great."

The New Zealand dollar bounced back over 50 US cents to 50.49 cents today on optimism China may help drag the global economy out of its slump.

Global stocks rallied on the prospect of a revival in China's economy, New Zealand's fourth largest export destination, amid expectations Premier Wen Jiabao will today announce further stimulus measures to infrastructure to stoke its manufacturing sector.

New Zealand commodity prices fell for the seventh straight month as the global economic slump eroded demand for the nation's exports, according to the ANZ Commodity Price Index. Some economists found a glimmer of hope this week in Fonterra Cooperative Group online auction of whole milk powder. The world's largest exporter of dairy products marked its first rise in milk powder prices on its controversial site this week.

The worldwide crisis reached Australia when its fourth-quarter gross domestic product shrank 0.5%, the first contraction in the economy of New Zealand's largest trading partner in eight years. It grew 0.1% in the third quarter, and was expected to grow 0.2% in the final three months of 2008, according to a Bloomberg survey.

The pause by the Australian central bank may weigh on Bollard's decision as New Zealand's economy tends to lag behind the rest of the world. There is still a chance he will move to the perceived goal of 2% to 2.5% swiftly, said Shamubeel Eaqub, economist at GoldmanSachs JBWere. "The need for policy relief in New Zealand is more intense, and the RBA's decision should be seen as an exogenous factor."

Westpac may reassess its forecast 100 point cut, as consensus of a 50 to 75 point grows, said currency strategist Imre Speizer. "There are mixed signals from the RBA, and it is possible Bollard may need to hold back," he said.

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