Interest rates tipped to be cut by year end

A leading economic thinktank says interest rates could be cut as early as the end of this year, with economic growth tipped to slow to a crawl.

In its September quarterly predictions, out today, the New Zealand Institute of Economic Research (NZIER) forecast growth to slow from 3.6 per cent in March 2005, to around 1.5 per cent per annum in 2007.

That could see the Reserve Bank (RB) look past inflation pressures -- with inflation at the top of its 1-3 per cent target band -- and cut rates in the early part of the forecast period to keep the economy afloat.

The monetary easing cycle could begin either at the end of this year or the first quarter of next year, the institute said.

Economists polled by Reuters earlier this month had expected the RB to leave rates unchanged at 6.75 per cent -- the highest in the industrialised world -- well into the first half of next year.

NZIER deputy director Vhari McWha said a number of factors are slowing growth.

"Production growth is slowing, we've also got slowing export demand on the back of a slowdown in all of our major trading partners, and also residential investment," Ms McWha told National Radio.

"We'll see double digit declines in the levels of residential investment in the next 18 months or so."

It isn't all doom and gloom however. Ms McWha said at the lowest point in the cycle, the country is tipped to grow by at least 0.3 per cent a quarter .

"You've got to say that we're doing pretty well. We're not seeing any decline in activity. For the bottom of the cycle, that 1.5 per cent is pretty good."

Households were also well equipped to cope with the slowdown, with "plenty of wealth on their balance sheets", following recent house price gains.

"The level of borrowing is actually sustainable, given the value of those assets," Ms McWha said.

Household spending is expected to remain robust, on the back of higher wages and salaries , although low savings levels remain a concern.

The NZIER expects the economy to be back on its feet, with growth of around 3.5 per cent in the year to March 2009.

Consumer price inflation is expected to remain close to the top of the target band, at 2.6 per cent in the year to March 2006, with a peak of 3.1 per cent by the end of 2007.

Today's forecast was downgraded from an earlier growth prediction of 2 per cent over the next two years, although the rebound is now expected to be more pronounced than previously thought.

- NZPA