More rate cuts ahead

Economists see a growing chance that the Reserve Bank will hack another half a percentage point from official interest rates when it reviews them again late this month.

Their comments follow the release of the New Zealand Institute of Economic Research's latest quarterly survey of business opinion today. The survey suggests that the recession is likely to be deeper than earlier forecast.

It showed that firms views of their own business activity in the past three months were the gloomiest since at least 1970.

ASB economist Jane Turner said the RBNZ's outlook for the economy to date has been "too rosy".

"Based purely on economic considerations the more prudent course of action in our view would be to cut [rates] 50 basis points at the end of the month and eventually dropping the Official Cash Rate to 2 percent," she said. The rate is currently 3 percent.

ANZ economist Philip Borkin said the RBNZ had kept 50 basis points of monetary policy easing "up its sleeve" when it reviewed rates last month. "The odds now shift toward such reserves being used," he said.

The NZIER survey, which is closely watched by the RBNZ, suggests that the economy shrank in the March quarter by as much as it did in the last three months of 2008. That was a whopping 0.9 percent contraction. The outlook for employment is also bad, with firms' intentions toward staffing levels being the worst since 1991.

The NZIER says there is scope for "further monetary stimulus" when the Reserve Bank next reviews interest rates on April 30.

"The Reserve Bank has the opportunity to make another cut to the Official Cash Rate (OCR) to bolster flagging consumer spending, which in turn would encourage firms to maintain their labour and capital stocks in readiness for meeting growing demand once the domestic and global economies start to pick up," NZIER economists said.

New Zealand has been in recession since the start of 2008 and most economists believe this will continue at least till the end of the June quarter - making six consecutive quarters of a shrinking economy.

The RBNZ has slashed official interest rates to 3 percent in the past eight months from 8.25 percent in an attempt to breathe life into the economy.

However, in recent weeks both the Kiwi dollar and longer term interest rates have started to push against the RBNZ's policies. The Kiwi has in the past few days reached three-month highs against the American currency, while longer term interest rates have climbed on the back of rising rates internationally and also due to huge demand from New Zealanders wanting to fix their mortgage rates for long periods.

The RBNZ has been on the receiving end of some criticism about its decision at its last rates review to effectively signal that the end of the easing of monetary conditions was in sight.

RBNZ Governor Alan Bollard last week took the unusual step of issuing a statement in which he said long-term interest rates were now out of line with RBNZ expectations. This caused a short term drop both in interest rates and the value of the dollar, but both began to rise again a couple of days later.

NZIER said that when seasonally adjusted the net balance of firms reporting a fall in their own activity worsened to 47 percent in the March quarter. This was even worse than the last survey result, which was a 44 percent reading.

Expectations improved slightly but were still low, with a net 38 percent of firms reporting they expected a drop in their own activity in the June quarter, compared with a net 43 percent expecting a decline in the previous survey.

When not adjusted, the net balance of firms expecting the general business situation to deteriorate in the next six months was 65 percent, following 64 percent in the December quarter.

A net 36 percent of firms reported they intended to reduce staff numbers during the next three months, after a net 34 percent actually did in the past three months. Those figures were the highest since late 1991.

Facing falling demand, firms were now operating at just 86.3 percent of full capacity.

Investment intentions for the next six months were the lowest recorded since the survey started in 1975, for both buildings and plant and machinery.

For the first time in nearly a decade, a net balance of firms reduced their selling prices in the past three months.

Increasing numbers of firms expected cost pressures to continue easing and prices to fall in the near future, which suggested inflation would drop further.

A net 51 percent of firms reported a decline in profitability in the past three months, the most for more than 30 years. A net 45 percent of firms reported they expected a decline in profitability in the next three months.

- By DAVID HARGREAVES with NZPA