Cash rate could fall, economists say

JAMES WEIR
Last updated 10:04 27/04/2012

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There is a 40 per cent chance of official interest rates being cut before Alan Bollard steps down as Reserve Bank governor in September, according to market pricing.

The Reserve Bank left the official cash rate at 2.5 per cent yesterday, but warned that could be "reassessed" should the dollar remain high despite falling commodity prices, opening the door to a rate cut or rates staying on hold for even longer.

The central bank also said inflation was restrained and would stay near the middle of the target band, while the domestic economy was showing signs of recovery, which would get stronger as the rebuild in Canterbury picked up later in the year.

Most banks still expected the first rate rise in either December or March.

The New Zealand dollar was trading about US81.4c shortly before the cash rate announcement, but the Reserve Bank's attempt to talk down the currency saw the kiwi rise shortly after the statement was issued, ending the day about US81.6c.

The Council of Trade Unions said the currency had been high for far too long, hurting exporters and jobs, though a further cut in the cash rate would only be of marginal help.

Some economists warned that Bollard was playing a dangerous game trying to get the kiwi down by cutting rates, and it could actually backfire badly and push the currency up even more.

A rate cut could see floating mortgage rates tick down slightly, though economists still warned borrowers to expect rates about 100 basis points higher by the end of next year and more the following year.

But with the chance of a rate cut, there was no urgency to move from floating mortgage rates to fixed terms. However, Westpac warned that over the next two years or so, there would be a substantial lift in floating rates eventually back above 8 per cent, from about 5.7 per cent now - the lowest since 1964.

Shortly after the statement was issued, Government-owned Kiwibank offered a special one- year fixed rate of just 4.99 per cent, 0.66 per cent lower than its standard rate. However the limited time offer was only open to borrowers with 30 per cent equity or more.

Westpac Bank chief economist Dominick Stephens said it was no longer "a given" that the next move in the cash rate would be up. Most economists had expected the first move up to come by December, with Westpac recently opting for March , with headline inflation likely to remain under 2 per cent till early next year.

"No new governor will feel under pressure to take early action on the OCR," Stephens said, "So we are thinking March."

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A persistently strong dollar could lead to a cut and markets were pricing a 40 per cent chance of that by September. Westpac's own estimate was more like 25 per cent to 30 per cent, Stephens said.

A couple of months ago, two to four year fixed rates looked the best value for borrowers, but given the recent fall in wholesale fixed interest rates, the better strategy was "float for now", he said.

Even if there was a rate cut this year, there would still be an extensive run of rate rises from 2013 to 2015, with the OCR moving back up to 6 per cent eventually, Stephens said - much higher than the 4 per cent or so others are picking.

"So fixing at some point would be prudent," Stephens said.

Bank of New Zealand said Bollard was playing "blind man's bluff" with the foreign currency markets. Getting the exchange rate down was never just as simple as cutting interest rates.

"At this stage it could horribly backfire on the bank," BNZ senior economist Craig Ebert said.

"This is serious stuff but potentially a very dangerous approach Bollard is taking," he said.

Lower interest rates would give the economy more juice than was justified, which could actually see the dollar going higher. Fairfax NZ

- Fairfax Media

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