Keep rates low: economists

Fairfax Media

KEEP IT LOW: The Reserve Bank must commit to keeping interest rates low for a long period, economists say.

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The Reserve Bank must commit to keeping interest rates low for a long period after an expected 50-basis-point cut to the official cash rate on Thursday, economists say.

The bank is widely expected to cut official interest rates from 3 per cent to 2.5 per cent this week.

Rates are likely to go even further down, hitting a trough of 2 per cent by the middle of the year. That should drag down floating mortgage interest rates, now sitting at about 6.45 per cent.

Medium to long-term mortgage rates are probably past their lows, seen a couple of months ago.

But Bank of New Zealand chief economist Tony Alexander said he might wait for a round of "small cuts" in three-year to five-year fixed-term mortgage rates.

"But as a conservative type, I would probably fix three years at 6.75 per cent," he said, which is where mid-term rates sit now.

A rate cut of just 25 basis points by the Reserve Bank this week could backfire and disappoint the market by failing to lower interest rates and the dollar, ASB Bank economists said. A 50-basis-point cut would put pressure on wholesale interest rates and the kiwi to come down, especially if the Reserve Bank commits to holding rates down until the middle of 2010.

Westpac Bank economists also think the Reserve Bank needs to take a stronger line on keeping rates low for longer, to keep long-term rates under control.

Economists point out that while there may be a "break in the clouds" of the economic storm globally according to the International Monetary Fund, there is no sign of an upturn in New Zealand.

Retail sales are shrinking, business spending on new plant and equipment is falling, manufacturing is going down, exports are in retreat and residential construction is plummeting, according to Bank of New Zealand.

"The recession continues and prospects for growth later on this year remain highly dependent on developments offshore," BNZ says.

Since the Reserve Bank's decision to cut rates to 3 per cent in early March, the economic signs in New Zealand look worse. The kiwi is about 10 per cent higher than the Reserve Bank expected, while long-term interest rates are up.

"If these current levels persist, they will undermine the projected economic recovery," ASB Bank chief economist Nick Tuffley says.

As well as cutting another 50 basis points, the Bank should be more explicit about keeping the cash rate low for a set period, to keep a lid on longer-time interest rates.

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