RBNZ may cut OCR to 2.5% as quake dents GDP, 2012 rebound

Article – BusinessDesk

RBNZ may cut OCR to 2.5% as quake dents GDP, 2012 rebound seen stronger

RBNZ may cut OCR to 2.5% as quake dents GDP, 2012 rebound seen stronger

By Jonathan Underhill

March 4 (BusinessDesk) – Reserve Bank Governor Alan Bollard may push the official cash rate back down to a record low next week as the Christchurch earthquake slashes economic growth this year. The disaster is likely to spur faster growth in 2012, economists say.

Bollard will lower the OCR by 50 basis points to 2.5% when he releases the Monetary Policy Statement on March 10, according to a Reuters survey. The results show some economists expect a milder 25 basis points cut, which would imply a further reduction in the OCR later this year.

Last month’s quake will more-than halve growth in gross domestic product this year to 1.2% from the 2.8% pace previously forecast, the survey shows. The track of the economy undershot the central bank’s forecasts in the third quarter of 2010, shrinking 0.2% against the bank’s estimate for 0.3% growth, and is teetering near a relapse into recession. Growth will come roaring back in 2012 as repair work gets underway, prompting Bollard to starting hiking rates again in the fourth quarter of this year.

“The earthquake has dashed hopes of a near-term rebound in the economy,” said Darren Gibbs, chief economist at Deutsche Bank, who is tipping a 50 basis point cut next week. “We expect that the RBNZ will maintain a positive medium-term outlook for the economy” given the pace of global growth and commodity prices though the domestic economy will be “coming off a much weaker starting point.”

The 90-day bank bill rate has tumbled in the wake of the latest Christchurch quake, sinking to 2.89% today from 3.22% on Feb. 21, the day before the city was shaken. The trade-weighted index of the New Zealand dollar fell to 65.3, the lowest since May last year, from 67.9 on Feb. 21.

Prime Minister John Key has stoked expectations Bollard will act next week to cut the OCR, saying such a move is expected in the aftermath of the quake and would be welcomed.

Lenders haven’t waited for the central bank to move. ANZ New Zealand, National Bank of New Zealand, Westpac Banking Corp., ASB, Kiwibank and TSB all lowered their one-year home-loan rates by 50 basis points this week. The median 1-year rate among major banks has dropped to 5.95% from 6.45%, and now sits lower than the median floating rate at 6.20%, according to the mortgagerates.co.nz website.

Cuts to fixed-rate mortgages “indirectly adds more pressure on the RBNZ,” said Nick Tuffley, chief economist at ASB. “It would be a hard message to sell if the RBNZ took back 50 basis points of mortgage relief in light of the economic outlook.”

Tuffley is also calling to a 50 basis point cut to the OCR, saying a 25 basis point cut “runs the risk of adding unnecessary volatility to the market” as traders bet on the prospects of a further reduction in the OCR as more economic data is released.

The earthquake risks taking the shine off the world’s third-biggest sporting event this year, with the Rugby World Cup set to bolster the nation’s foreign exchange earnings with an influx of sports fans and provide a showcase for New Zealand’s appeal as a tourist destination.

Christchurch mayor Bob Parker is insisting that the city wants to retain its involvement in the series though there are question marks about the availability of accommodation and the functionality of infrastructure. Images of the quake have the potential to dent enthusiasm from overseas visitors.

Goldman Sachs & Partners economist Philip Borkin cut his forecast for growth in visitor arrivals this year to 0.5% from 4.7%, while growth for 2012 jumps to 6.3% from 2.5%.

Borkin is forecasting a 25 basis point cut next week and says the economic rationale for lower rates is “marginal”.

(BusinessDesk)

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