By BRIAN FALLOW economics editor
The financial market expects Reserve Bank Governor Don Brash to cut interest rates a quarter of a percentage point on Wednesday, but most market economists expect it to be disappointed.
The pricing of 90-day bank bill futures on Friday implied a cut of 25 basis points in the official cash rate on Wednesday and at least a further 25 points by the end of June.
But a Reuters poll of 14 economic forecasters on Thursday found only three predicting a rate cut this week; collectively they put the odds against a cut at two-to-one.
There is less difference between dealers and economists about the position by mid-year.
Eleven of the economists surveyed think Dr Brash will have eased by the end of June, most likely by 50 basis points.
The more dovish view in the dealing rooms may reflect the fact that they are more attuned to international investor sentiment than to the nuances of the domestic data.
The case for an interest rate cut is entirely based on the implications of the slowing world economy for what is an export-led recovery here.
Consumer confidence in the United States (the world's "consumer of last resort") has fallen sharply, Australia's economy shrank last quarter, and Japan's Finance Minister has talked of its public finances being on the brink of collapse.
WestpacTrust chief economist Adrian Orr says that given that Australia has now cut rates twice, if New Zealand does not follow suit international investors are likely to take the view that the Reserve Bank has its head in the sand and runs the risk of repeating past mistakes, notably being too slow to ease after the Asian crisis.
But Mr Orr thinks Dr Brash will wait until the May monetary policy statement to ease.
"An easing in May is only likely if domestic demand fails to build sufficient momentum to leap the growing international growth chasm. By May it will be clearer just how much domestic momentum there is and how wide the international chasm has become," Mr Orr said.
Evidence of that momentum is:
Exports were up 29 per cent in value terms, and 10 per cent in volume, over 2000 reflecting the trifecta of a low exchange rate, strong world prices and good growing conditions.
ANZ's commodity price index showed that, despite slowing world growth, world prices for New Zealand's major exports rose 2.2 per cent last month, to their highest level since 1997, and 4.2 per cent in New Zealand dollar terms.
Tourist arrivals in January were up 30,000 or 18 per cent on January last year.
Business confidence has recovered from its plunge last year. Firms' investment and hiring intentions have improved. Few cite the cost of money as a constraint.
There are signs of life, albeit tentative and still anecdotal, in the housing market.
Employment grew 2.4 per cent over the second half of last year, which should be positive for consumer spending this year.
Increasingly economists are citing labour as a constraint on growth.
Partly because of net emigration, growth in the working age population has slowed from about 1.5 per cent a year in the mid-1990s to 0.5 per cent now.
ANZ chief economist Bernard Hodgetts said that on top of that, growth in output per person employed has been less than 1.5 per cent a year over the past decade.
This combination of subdued workforce and productivity growth, makes for a lower potential growth rate, the rate of growth that can be sustained without inflation becoming a problem.
Domestic signs say no to cut
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