Bollard to hold rates at 7.25% as economy cools

Market economists are unanimous that the Reserve Bank will leave interest rates on hold on Thursday but they will pore over the March monetary policy statement for what its economic forecasts and language imply about when rate cuts can start.

The markets see a 50:50 chance Governor Alan Bollard will start cutting the official cash rate, currently 7.25 per cent, in July and regard a cut by the end of September as a near certainty. He is expected to have eased by either 50 or 75 basis points by the end of the year.

HSBC chief economist John Edwards said there was clear evidence of a sustained weakening in domestic demand - the test which Bollard's January statement imposed before rate increases could be ruled out.

"We ... expect the further evidence of a slowdown to be recognised and language ruling out a future rate cut to be slightly but sufficiently moderated to allow the possibility of an easing in the second half. This would help the New Zealand dollar to go down further, a [Reserve Bank] objective."

Among the signs of economic deceleration since the last cash rate review:

* Retail sales in the December quarter were down in volume terms, seasonally adjusted.

* Full-time employment and hours worked were down in the December quarter.

* The number of house sales fell in December and January, to the lowest level since 2001, and growth in mortgage borrowing is moderating.

* World prices for export commodities have fallen for nine months.

* Net immigration is weak, running at an annual rate of 7000 compared with a peak of more than 40,000 three years ago.

* Business confidence is in the pits and consumer confidence has weakened too.

"The slowdown is here with all the subtlety of an uppercut," Westpac chief economist Brendan O'Donovan said.

The Reserve Bank had juggled two risks over the past year: the risk of letting the inflation genie out of the bottle against the risk of being over-zealous and slowing the economy excessively.

"The first of those risks prompted the bank to tighten late last year when the housing market threatened to take off once more. However, it is the risk of a monetary policy-induced slump that looms larger," O'Donovan said.

"Thursday's statement might be too early for the bank to drop its 'no cuts in the foreseeable future' phrase. We suspect there will be a reluctance to soften the phrase given its Maginot Line role on holding the market from advancing expectations of easing. Eliminating it would spark speculation that the bank has been rattled by the speed at which economic performance has begun to founder," said O'Donovan.

"However, given the pervasiveness of poor sentiment and rising job insecurity, the risks of the housing market being reignited [as wholesale interest rates fall] is diminished."

But ASB Bank chief economist Anthony Byett is not so sure. There had been occasions in recent years when borrowing growth and house sales had fallen for a month or two only to rebound, he said.

The average interval between putting a house on the market and selling it remained short by historical standards and the number of properties listed was still relatively low, Byett said, suggesting the potential for upward pressure on prices given any stimulus to demand.

Interest rates

The Reserve Bank has raised interest rates nine times since January 2004.

In January, Reserve Bank Governor Alan Bollard said there was "no prospect" of a rate cut.

Nine of 13 economists surveyed by Bloomberg expect a rate cut by September.