Exporters call for 2pc cut

The Reserve Bank should cut official interest rates 2 percent according to a business group, though bank economists expect a 1.5 percent drop at the extreme.

The Reserve Bank is widely expected to cut the official cash rate from 6.5 percent to 5.5 percent on Thursday, though some economists are picking rates to fall to 5 percent.

Reserve Bank governor Alan Bollard last cut rates 1 percent in October.

Westpac Bank economists said they expected a 1 per cent cut (100 basis points) on Thursday because the credit crisis was still "ravaging" financial markets and the world economy was rapidly losing steam.

New Zealand would be hit by lower commodity prices and weaker demand for exports.

Deutsche Bank is calling for 150 points to be cut - the most aggressive of forecasters - because of its pessimistic view of the world economy. That view was reinforced by figures on Friday showing house building consents diving again in October, to more than 40 per cent below the levels of a year ago.

The Manufacturers and Exporters Association is calling on the Reserve Bank to cut rates even more - from 6.5 percent to 4.5 percent - after aggressive cuts by other central banks around the world.

Big interest rate cuts internationally to combat worsening economic conditions meant New Zealand still has one of the highest rates in the world.

"Lower interest rates and exchange rates are needed to stimulate an export-led recovery," association chief executive John Walley said. The Bank of England cut rates by 150 basis points this month and the Reserve Bank of Australia has dropped 200 points to 5.25 percent, with another 75-point cut expected this week.

New Zealand has already dropped 175 points since the middle of the year, so another 100-point move would bring it into line with Australia's expected move.

Some economists have suggested the official cash rate may end up at 3.5 percent and Mr Walley said it was important to get rates down quickly.

Westpac said that after a recession in the first three-quarters of this year, there might be a small bounce in the final quarter. But growth next year might be close to zero, with any prospect of a recovery pushed to 2010.

The central bank needed to bring interest rates into "easy" territory to avoid a deeper recession, Westpac said.

But there were some positive factors at play, too.

Lower rates had prompted people to refix loans on shorter terms, of a year or less, which meant the benefit of lower official rates would flow through to help household budgets more rapidly than in the past.

October's tax cuts and a much lower petrol price would also help free up cash for other spending.

Combined with a much lower dollar giving exporters a boost, those factors should see a 100 point cut as enough to "tide the Reserve Bank over" till January.

Inflation is now well down the list of concerns for the Reserve Bank, with a big drop in petrol prices expected to bring inflation to 1 percent within a year.

Westpac economists said that, at each review of interest rates this year, the global credit crisis had become worse and the outlook for world growth slower.

INTERESTING TIMES
The Reserve Bank is expected to cut official interest rates heavily on Thursday. Most economists expect the cash rate to drop from 6.5 percent to 5.5 percent. A few say a fall to 5 percent is needed. Floating mortgage rates are already down to 8.7 percent. One-year fixed loans are down to 7.3 percent. The cash rate may go as low as 3.5 percent by mid 2009. The Reserve Bank of Australia is expected to cut 75 basis points this week.