Minimum rate cut expected

By BRIAN FALLOW economics editor

Market economists are almost unanimous in their belief that Reserve Bank Governor Alan Bollard will shave another quarter of a percentage point off interest rates on Thursday.

But ASB Bank chief economist Anthony Byett is calling for a double dose of easing from Dr Bollard - a cut of half a percentage point, which would reduce the official cash rate to 4.75 per cent.

"At best economists put the growth rate in the current March year at 2.3 per cent, at worst 1.5 per cent. These rates are poor. In per capita terms they are awful. They mean job losses," Byett said.

Business confidence was weak, the global economy fragile, inflation subdued and the exchange rate strong, he said.

But a Reuters poll of economists last Thursday found only a slim majority who believe the Reserve Bank will deliver any further easing beyond the 25 basis points expected this week.

National Bank expects Bollard's statement on Thursday to leave the door open for a further cut in September, and that that cut will eventuate to ensure a soft landing.

"The exchange rate is constraining growth, the terms of trade remain weak and consumers are consolidating after a spending binge over the past year," said National Bank economist Cam Bagrie.

It was hard to see where inflation pressures would come from, he said, and there was no logical reason for New Zealand's official cash rate to be higher than Australia's (4.75 per cent) at this stage of the cycle.

Finally, and perhaps decisively, Bollard was open to the idea that New Zealand's sustainable growth rate might be higher than the Reserve Bank had thought and would be inclined to give the economy a chance, Bagrie said.

The Bank of New Zealand's head of market economics, Stephen Toplis, said that if anything set a path for more easing than the Reserve Bank had suggested it would be the currency.

Despite its recent rally the BNZ sees some further weakness ahead for the United States dollar and accordingly a rise in the New Zealand exchange rate.

"But it will be modest compared with what we have seen and we are looking for the turning point, which is likely some time late this year or early next year."

The BNZ's forecast of two more easings instead of one was purely predicated on the assumption of some further rise in the exchange rate over the next few months, Toplis said.

At the time of the monetary policy statement on June 5 the Reserve Bank highlighted three things it would be watching: business confidence, international growth and the exchange rate.

"Its implicit assumption was that business confidence would bounce back from artificial lows [related to Sars and electricity shortages]. So far it has done that. Where it goes from here is a moot point but it's our view that it will bounce further," Toplis said.

The consensus view among economic forecasters is that growth in the United States will pick up to around 3.5 per cent next year, though the outlook for Europe and Japan is more sombre.

Toplis said: "If you look at what's happening to global equity markets and the shape of yield curves there is some indication that people are becoming a little more optimistic about the medium-term prognosis for growth."

The Federal Reserve forecasts US growth to rebound to between 3.75 and 4.75 per cent, but when testifying to Congress last week chairman Alan Greenspan cited risks to that recovery, and indicated the Fed was prepared to keep depressing the monetary accelerator to avoid even the "remote" danger of deflation.