Brash keeps rein on cash rate this time

By BRIAN FALLOW

As expected, Reserve Bank Governor Don Brash left the official cash rate unchanged at 5.25 per cent yesterday.

He had surprised the market with an out-of-season 50 basis point cut on September 19.

That move was precautionary, Dr Brash said yesterday. It recognised the inevitable adverse effects of the attacks on the United States on September 11 and the likely effect on confidence.



The New Zealand economy appeared to have been at least as robust before the attacks as the bank had previously expected, Dr Brash said, in a likely reference to the rip-roaring 2 per cent gross domestic product growth for the June quarter reported last week.

Dr Brash's Australian counterpart, Ian Macfarlane, announced a 25 point cut in Australia's cash rate to 4.5 per cent yesterday and drew a similar contrast between domestic strength and international weakness.

He said Australian GDP grew at an annualised rate of more than 3 per cent in the first half of this year, even though the construction upswing had barely begun.

But Australia's growth outlook, "quite solid' in the short term, would eventually feel the dampening effects of the international weakness, even with a very weak exchange rate.



The Bank of New Zealand's head of market economics, Stephen Toplis, thinks Dr Brash will cut another 25 points on November 14.

"But given the tenor of of today's statement this should not be considered a fait accompli," he said.

"For further easing to occur, signs of weakness in the domestic economy are probably more important than any further deterioration in global activity. We already know the world is a mess.

"So much so that it probably gives the Reserve Bank the green light to go at least another 25 basis points and possibly as much as 75.

"But it is hard to do that when there is no domestic spare capacity. Signs that this may develop are what the bank is now looking for."

Westpac economist Nick Tuffley said the New Zealand economy was in good shape to run from the synchronised global slowdown, but it could not hide.

Westpac wants to see at least a 25 point cut on November 14, with another probably early next year.

Deutsche Bank detected an easing bias in the Reserve Bank's statement yesterday.

But economist Darren Gibbs said Dr Brash had been careful to remind the market that he was focused on the outlook for inflation as well as economic activity.

"On that score, with the economy appearing to be operating above the level consistent with stable inflation, we think the the bank will be content to allow growth to fall a little below trend over the coming year," Mr Gibbs said.

On Tuesday, the United States Federal Reserve cut rates another 50 points to 2.5 per cent - the lowest for nearly 40 years - and hinted that further cuts might be necessary.