Rate cut expected in May as business confidence falls

Another grim business confidence survey points to a rate cut in May economists say. Photo / Bloomberg

Economists increasingly expect the Reserve Bank to cut interest rates in May after yet another survey points to falling business confidence.

The NZ Institute of Economic Research (NZIER) quarterly survey of business opinion showed confidence fell further in the March quarter, pointing to slower economic growth in the first half of 2019.

A seasonally adjusted net 27 per cent of firms surveyed in the New Zealand Institute of Economic Research's expect economic conditions to deteriorate over the coming months compared with a seasonally adjusted 18 per cent that had expected a deterioration in the prior quarter.

"This is a fairly downbeat read of the economy... it was comprehensively negative," said Christina Leung, NZIER principal economist.

The Reserve Bank indicated last week it was leaning towards cutting rather than hiking rates when it makes its next move.

For many economists this latest survey result was seen as indicator that it will cut at its next meeting in May.

"We now expect the RBNZ to cut the OCR by 25 basis points in May, followed by a second 25 basis point cut in August," wrote ASB senior economist Jane Turner.

"Businesses continue to report a decline in profitability, and we expect this to directly impact employment demand and investment activity over 2019."

Kiwi Bank chief economist Jarrod Kerr economist said he also saw a cut in May as likely, with "a quick fire second 25bps in (June or) August."

ANZ chief economist Sharon Zollner had already been picking an August rate cut.

"Today's release skews the balance of risks towards an earlier cut rather than later," she wrote.

There was a rising number of businesses expecting a deterioration in general economic conditions but "of more concern was the decline in firm's own domestic trading activity," said NZIER's Leung.

Regarding their own activity, a net 7 per cent of respondents expect their own business activity will pick up in the next three months, down from 16 per cent three months ago.

A net 1 per cent experienced contracting activity in the March quarter versus a net 4 per cent that saw an improvement in the December quarter.

NZIER says the own activity measure tends to be a better indicator of GDP than the headline confidence figures.

"The data suggests further slowing in economic growth over the first half of 2019," she said, adding annual growth could slow to below 2 per cent over the first half of the year.

The last time New Zealand's rolling annual growth figure was below 2 per cent was in the December quarter of 2011.

Leung said the QSBO should give the central bank comfort in its view that the next move will likely be a rate cut. It does "provide more justification for them to be cutting interest rates," she said.

- additional reporting BusinessDesk