OCR 'will hit two percent'

Economists say official interest rates are likely to plummet to as low as 2 percent before the middle of the year in the wake of today's slashing of the Official Cash Rate.

This morning's 150 basis-point cut, the same as was delivered by the Reserve Bank in December, was bigger than the majority of economists had picked and is leading to further revisions of forecasts.

Before this morning, the lowest pick for the ultimate bottom of the OCR was 2.5 percent.

However, ASB chief economist Nick Tuffley, said today he was picking a likely floor of 2 percent.

He added, though, that theoretically there was "nothing to stop the RBNZ cutting all the way to zero if it views that as necessary".

There may, however be practical limitations to the effectiveness of OCR at low levels, he said.

BNZ head of research Stephen Toplis is also now picking a 2 percent low.

The RBNZ was, he said, "terrified" by what it saw happening overseas and the likely implications on our economy "so it's taken a no-holds barred approach".

Just six months ago the OCR was at 8.25 percent, but Bollard has taken a large axe to it in an attempt to resuscitate a New Zealand economy in recession since the start of last year.

JP Morgan economist Helen Kevans said the New Zealand economy was "well entrenched in a recession that, on our forecasts, will likely extend for six straight quarters".

She was picking the OCR to be 2.25 percent by April.

"The aggressive action by the RBNZ today certainly is warranted," she said.

Toplis said the BNZ had now lowered its "already miserable" forecasts for 2009 and was picking that the New Zealand economy would shrink 0.9 percent this year, on top of an expected 0.3 percent drop in GDP for 2008.

"Alas, from here on in the outlook for the New Zealand economy is very poor indeed," he said.

"We have weathered reasonably well stage one of the recession, but stage two - the wash from the global rout - is only just hitting us."

ASB's Tuffley picked another full percentage point cut in interest rates at the RBNZ's March review.

"Even though the RBNZ has now had the opportunity to factor in a lot of bad news there is still more to come," he said.

"In our judgement the RBNZ has little to lose by getting the cash rate even lower. High inflation is not going to be an issue and monetary policy is the swiftest buffer available."

JP Morgan's Kevans predicted that New Zealand's rate of inflation, which tumbled in December from an 18-year high of 5.1 percent to 3.4 percent would fall below the RBNZ's 1 percent to 3 percent target range by the end of this year.

- © Fairfax NZ News