Fed puts squeeze on Brash

By DITA DE BONI

Reserve Bank Governor Don Brash is under more pressure than the kiwi dollar after US Federal Reserve chief Alan Greenspan cut interest rates by half a per cent yesterday.

Economists now think that the cash rate rise Dr Brash hinted at last month is unlikely to proceed, with some calling for him to opt for a rate cut instead.

According to the Federal Reserve, Dr Greenspan's decision came "in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of the financial markets, and high energy prices sapping household and business purchasing power."

Some local commentators called those conditions close enough to the New Zealand experience that authorities here should follow suit.

The chief executive of the Employers and Manufacturers Association (Northern), Alasdair Thompson, called on Dr Brash to copy Dr Greenspan's actions "urgently."

"Greenspan's quick response to the investment nosedive in the US stockmarkets should invite Dr Brash to take a look at the pitiful performance of ours, which has been going on much longer," he said.

The country's banks have revised their hike forecasts in light of Dr Greenspan's gambit. Deutsche Bank said it was difficult to envisage the Reserve Bank tightening the economic screws at its review on January 24.

Fixed interest strategist David Plank told Bridge News: "I think it is a big ask for them to go from being the most aggressively hawkish central bank in the world a month ago to being dovish in January."

The National Bank abandoned its January hike forecast in favour of a 25 basis point hike in March, and Sydney-based HSBC economist Grant Fitzner said the Reserve Bank would hold off for a couple of months "to see how growth and inflation pan out."

The ANZ Bank, however, said the prospect of a higher official cash rate was not necessarily negated by the US rate cut.

"Early signs were apparent in late 2000 that the higher incomes associated with strong export growth over the past year are starting to reinvigorate domestic economic activity and sentiment.

"Should this ... continue into early 2001, then the associated pressure on the NZ economy's already limited spare capacity is likely to concern the [Reserve Bank]," which would lead to upward pressure on the official cash rate, it said.

The US stock market responded favourably to the surprise interest rate cut, with the Dow Jones closing up 2.81 per cent and the moribund Nasdaq rebounding 14 per cent.

Soon after, the New Zealand market rallied and later closed up 1.3 per cent, or 24.35 points.

Ord Minnett executive Arthur Lim, who watched the Dow Jones shoot up 300 points in the minutes immediately following Dr Greenspan's move, said the implications for the local stock exchange, highly dependent on what happened in the US, had to be positive.

"Today's [events] will have an impact because we depend on offshore investors. They are still our principal investors, especially in the heavily weighted stocks like Telecom.

"The market is taking the move as a strong signal that the Federal Reserve is trying to stabilise the US economy and will take any action necessary to do so. The market is reading that as very positive more in the medium to long term.

"In the short term, there will continue to be earnings downgrades because it does take six to 12 months for interest rate movements to take effect."

But James Gore at UBS Warburg said it was too soon to start rolling out the barrel. He agreed that Dr Greenspan's actions would be positive for sentiment overall, but "the key will be what happens in the coming days or weeks - that will be the turning point. You can't read too much into one day's trading."

Taking caution even further, Brent Sheather at Craig & Co said he was still worried that the US economy was headed for a hard landing, and he would not stop moving clients away from risky equities to bonds.

"One swallow does not a summer make. It's true that if shares are doing well in the States it makes people more inclined to do more here. But the major beneficiaries will be the likes of Telecom. Whether that will flow through to the likes of Advantage is another question."



The Greenspan-inspired Wall St rally caused the US dollar to reverse its downward slide, sending the kiwi back below 44USc for much of the day.

It fell as low as 43.75c from 44.68c on Wednesday. But by its local close yesterday it had climbed back to 44USc.

The Australian dollar was trading 1.3 per cent down.

The rally also lifted the Australian sharemarket 1.8 per cent, Hong Kong 4 per cent and Singapore 2.6 per cent.