After his aggressive interest rate cut two weeks ago, practically nobody is expecting Reserve Bank governor Don Brash to cut the official cash rate (OCR) again on Wednesday, the official review date.
But just as near universal are the expectations of further rate cuts later on.
Brash cut the OCR from 5.75% to 5.25% on September 19, primarily as an insurance policy against the likely impact on global growth of the September 11 terrorist attacks in the US.
"Given the massive writedowns in the outlook for the global economy, rates are only heading one way at the moment," says Cameron Bagrie, an economist at National Bank. Bagrie expects the next rate cut will be timed for the November 14 monetary policy statement. "(A cut in the OCR to) 5% is a gimme as far as I’m concerned. You couldn’t rule out a bigger cut,’’ he says.
Adrian Orr, chief economist at WestpacTrust, says Brash has two big reasons to wait until November, the weakness in the New Zealand dollar since the terrorist attacks and the unexpectedly strong 2% growth in the domestic economy in the June quarter. The market had been expecting only 1.4% growth for the quarter.
"We think the economy’s kicking on quite well at the moment, but most of our major trading partners are lining up in a recessionary formation,’’ Orr says. WestpacTrust is looking for at least a 25 basis point cut on November 14.
While critical of the Reserve Bank changing rates outside its official review dates, Stephen Toplis, an economist at Bank of New Zealand, "we weren’t in the slightest bit critical of the decision to cut,’’ he says. Indeed, based on the central bank’s previous pronouncements, "50 basis points now look increasingly likely (in November). An eventual 75 basis point move before the cycle is complete is not out of the question.’’
Topliss says there’s even an outside chance of a rate cut on Wednesday. "We think the possibility is very slight, but it is no longer zero.’’
David Drage, an economist at ANZ Bank, is punting on no change on 3 October and a 25 basis point cut on 14 November. ``The reason why I would be towards the slightly more cautious end of the market is in reaction to the GDP data. There’s a fair amount of momentum,’’ Drage says.
Clearly, an international slowdown will impact on New Zealand, but Brash will still be mindful of some strong domestic inflationary pressures, he says. These include the strength of the labour market, with the participation rate at a historically high level.
"Even if the economy is undermined by recent developments in the world economy, those labour market pressures are likely to remain for some time,’’ he says.
