Record cut as Bollard says worst is over

The shallow recession is over, says Reserve Bank governor Alan Bollard, but economists still expect him to keep slashing interest rates, up to 100 basis points more late next month.

In a record-breaking move, Dr Bollard chopped the official cash rate from 6.5 percent to 5 percent yesterday, the lowest level for five years. "We believe the recession has ended and we will have positive but low growth for the next four quarters."

But trading bank economists are not so sure the worst is over.

While the Reserve Bank expected annual gross domestic product to contract 0.2 percent at worst, Bank of New Zealand expected a trough of 0.8 percent and it could be worse.

The recession this year was expected to carry on till the June quarter next year, BNZ said. It expected official cash rates to be cut another 50 basis points in January, before possibly going to 3.5 percent by June.

"The cash rate will fall more than the Reserve Bank forecasts," BNZ's Stephen Toplis said.

ANZ Bank said the central bank was "too optimistic" about the New Zealand and global economies. It also expected the official cash rate to hit 3.5 percent by April.

ASB Bank expected a 100-basis-point cut in January, after yesterday's "bold" 150-points cut which showed just how worried the central bank was about the global credit crisis. March would see a 50-point cut, said ASB economist Jane Turner. "Globally, the news is likely to get worse."

Dr Bollard said the recession from the start of the year had been "very shallow" and was not much different from Australia.

New Zealand was hit by drought and the housing slowdown earlier in the year, sparking the downturn, made worse by the global financial crisis and economic slowdown.

The Reserve Bank expected the jobless rate to rise to 6 per cent from 4.2 percent now, which Dr Bollard said was disappointing, but not high compared with past recessions.

House prices were still expected to fall 16 percent from their peak. The fall was only half way through, with the balance in the first half of next year, Dr Bollard said.

Retailers would not have a great Christmas, "but we don't see a major contraction [in spending]".

The Reserve Bank expected little growth in consumer spending though petrol is cheaper.

Despite a shallow recession, Dr Bollard is "front-loading" rate cuts in the face of global financial market turmoil and a gloomier outlook for New Zealand's main trading partners, who are expected to contract or grow only slowly in coming months.

But he said that if the global economy worsened, the Reserve Bank had "a lot of ammunition in this box" to cut interest rates much more than other big economies. "We went into a shallow recession early [this year] ... but we can pull out fast."

But recent information from trading partners was depressing, Dr Bollard admitted.

CHRISTMAS BONUS
Reserve Bank cuts official interest rates a record 150 basis points to 5 percent.
Interest rates are now "expansionary", giving the economy a boost.
Some economists expect another 100 basis point cut on January 29.
But Reserve Bank indicates more, but smaller, cuts are possible.
Banks cut lending rates again, with floating rates as low as 7.2 percent. Recession is over, but 2009 will see just slow growth.
A strong pick up in growth of 4.3 percent in year to March 2011. 

- © Fairfax NZ News