Rate cut expectations grow

Thursday 24th February 2011

Expectations are growing that the Reserve Bank will cut the official cash rate (OCR) next month, following Tuesday's devastating Christchurch earthquake, although some economists question the value of such a move.

In an early afternoon note today, Deutsche Bank chief economist Darren Gibbs said the markets had moved to fully price a cut of 25 basis points in the OCR at the Reserve Bank's next scheduled announcement on March 10.

"However, we see little point in such a small reduction. Therefore, we expect the RBNZ will lower the OCR by 50bps to 2.5%, indicating that the reduction is to provide greater assurance that the forecast recovery remains on track despite the tragic events in Christchurch."

The Government's recently revised goal of returning the operating balance to surplus in 2014/15 now seemed "impossible", Gibbs said.

While estimates of the damage were hard to come by for now, he thought it was clear the damage caused by the earthquake was greater than the September quake which caused estimated damage of $5 billion to $6 billion.

The economic impact of the earthquake would be significant. With the Canterbury region accounting for 15% of national GDP, the direct near term economic impact could easily be of the order of 0.5% or GDP or more, Gibbs said.

ASB also today said it expected the Reserve Bank to cut by 50 basis points, possibly before March 10.

The personal, economic and financial ramifications for the entire economy were becoming increasingly severe as more information came to hand, ASB economist Jane Turner said.

"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."

Before the latest earthquake, the Reserve Bank had already flagged the possibility of an OCR cut during this cycle should domestic conditions continue to deteriorate, following underwhelming data which indicated economic activity stalled over the second half of 2010, Turner said.

"Overall, the patchiness of the underlying activity in the NZ economy means that continued monetary policy stimulus is appropriate."

Yesterday Westpac said it expected a 50 basis point cut in March, but some other economists were unconvinced of the case for a rate cut.

Goldman Sachs economist Philip Borkin said that while the possibility of a rate cut could not be ruled out, he did not think the economic rationale for an interest rate cut stacked up.

The OCR was already at a low level, the earthquake was relatively localised, and it was difficult to imagine a 25 or 50 basis point cut providing any meaningful stimulus given the significant delays before any reconstruction work could be done.

BNZ senior economist Craig Ebert expected the Reserve Bank to hold the OCR steady for now, which he thought would be the right decision, saying the OCR would not be the right tool.

NZPA

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