'Surreal' global picture key to future rate cuts

Despite the Reserve Bank's record 150 basis point rate cut today, economists expect more cuts ahead as the "surreal" global economic picture continues to darken.

Three senior economists polled by Businessday.co.nz expect Reserve Bank governor Alan Bollard to cut the Official Cash Rate to 3.5 percent next year as the job and housing markets continue to weaken. Today's cut dropped the OCR to 5 percent.

UBS senior economist Robin Clements, however, picked an OCR low point of 4.5 percent based on the expectation of a 50 basis point cut when the central bank next reviews the OCR on January 29.

"It seems a 50 basis point cut in January is clearly possible and, if so, there is a risk of another cut in March that would take the OCR below 4.5 percent. As the Reserve Bank says, the OCR trough will be dictated by global developments."

Bank of New Zealand head of research Stephen Toplis said the cumulative easing of 325 points from the peak rate of 8.25 percent six months ago was "amazing".

"It's a surreal world when your ever conservative central bank slashes its cash rate by 150 basis points and no one bats an eyelid. Yet that's exactly what happened today," Toplis said.

"We're looking for a further 50 basis points in January leading to a low of 3.5 to 4.0 percent by June of next year."

While the economists Businessday.co.nz spoke to said today's OCR cut was appropriate given the state of the economy, it also raised expectations of more aggressive rate cuts.

"He [Dr Bollard] did what he should have done, it was a good move, [he] probably needs to do more of the same, and seems prepared to do so," Deutsche Bank chief economist Darren Gibbs said.

Shamubeel Eaqub, director of Australia & New Zealand investment research at Goldman Sachs JB Were, said after today, he expected cuts aggressively to 3.5 percent.

ASB Chief Economist Nick Tuffley, who also expects the OCR to trough at 3.5 percent, said a big concern that may impact on any recovery in the domestic economy continued to be lack of confidence in the global arena.

"The biggest global concern would be if all the frantic action numerous governments take is not enough to ensure [that] a global economic recovery starts to kick in over 2010," Tuffley said.

Both Tuffley and Eaqub said they expected unemployment to reach 6 percent, with the risk of a spike in the jobless rate if there is an abrupt slowdown in the tourism sector.

Tuffley said he anticipated house prices to continue to fall in 2009, with Eaqub and Gibbs not expecting a recovery in the housing sector until 2010.

"I can't see the beginning of sustained recovery until 2010. House prices must fall another 10-15 percent first," Gibbs said. 

- © Fairfax NZ News