Brash delivers half-point cut

By BRIAN FALLOW, Economics editor

Reserve Bank governor Don Brash yesterday gave the markets the 50 basis point rate cut they had been looking for, but held out scant hope of more.

He said the cut in the official cash rate to 4.75 per cent, its lowest for two years, was deeper than was warranted by forecasts of the world slowdown this year and next year, and assumed further falls in export prices.

The aim was to get ahead of the curve, he said.

"Monetary policy has now been set to accommodate quite a bit of further weakening in the global environment."

In other words, likely further bad news on the international front is built into this cut.

But WestpacTrust chief economist Adrian Orr said he was flabbergasted that Dr Brash should raise the possibility of having to reverse some of these cuts "in the not too distant future" should the world rebound more quickly than expected.

"We are a pimple on the world's backside, and it has just sat down," Mr Orr said.

He expects a further cut in the official cash rate to 4.25 per cent by the end of March next year. In the new year, there would be more focus on domestic slowdown than the Reserve Bank was factoring in.

Though the New Zealand economy had entered the world slowdown with plenty of momentum, it would catch up with us eventually.

"We can run but we can't hide," Mr Orr said.

The Reserve Bank forecasts a sharp but brief slowdown in New Zealand - over this quarter and the first half of next year - but a recovery that comes early enough to prevent too much slack emerging in the economy.

It expects annual average growth to slow to around 1.5 per cent over the year to March 2003, rising to 3 per cent the following year.

That assumes a rapid recovery in the world economy through next year as the heavy stimulus from monetary and fiscal policy overcomes the effects of the slowdown under way before September 11.

Dr Brash said that, if the world environment turned out even worse than the bank expected, "we may well be faced with the need to reduce interest rates still further".

But Deutsche Bank chief economist Ulf Schoefisch rates the chances of a further cut in this cycle as no better than 30 per cent.

The Reserve Bank had set a high hurdle for a further cut, he said.

Trading partner growth forecasts, as measured by the international consensus forecasts, would have to deteriorate substantially. But they had already been slashed since September 11 and significant further cuts were less likely.

As well, the bank assumed a drop of more than 10 per cent in export commodity prices. Current indicators suggested that the risk it would be more than that was limited.

And the bank expected growth to slow to around 1.5 per cent, which was at the pessimistic end of forecasts.

Bank of New Zealand chief economist Tony Alexander rates the chances of a further rate cut in the new year as about 50:50.

Business confidence was not too gloomy, he said, and the most recent Colmar Brunton survey of consumer confidence had shown some recovery, he said.

Ninety-day bank bill yields fell to 4.8 per cent from 4.88.

Futures prices imply the 90-day rate will stay about there until the December quarter next year.