Christchurch Earthquake: Drop to OCR says would be useful

A drop to the official cash rate -- after Treasury figures showing the massive cost to the economy of Christchurch's quake -- would be useful, Prime Minister John Key says.
Treasury estimates released yesterday put the cost of last month's quake at as much as $15 billion and that it would also knock gross domestic product growth back by 1.5 percentage points while tax takes would be also be down.
The 1.5 point hit to growth could see GDP $15 billion lower over the five years to 2015.
However the rebuild efforts would provide a silver lining.
Mr Key was asked this morning if the figures would make a reduction in the official cash rate this week inevitable.
``That's a matter for the Reserve Bank governor and it's for him alone to decide what happens on Thursday,'' he told Breakfast on TV One.
``But certainly the markets have factored in a likely cut in the official cash rate. You've got to say lower interest rates probably help the country, but that ultimately is a matter for the governor.''
Mr Key said he was not attempting to influence the process but was stating facts.
``The question was would it be helpful, well low interest rates help.''
Treasury yesterday said the GDP hit of 1.5 points this year would be solely due to the February earthquake.
``From 2012, the recovery will bring a sizeable boost to residential, commercial and infrastructure investment, placing upward pressure on prices depending on the rate of rebuilding.''
Treasury said domestic developments occurred against an international backdrop of political unrest, high commodity prices and rising inflation and even before last month's quake the economy was weaker than expected last year, and that weakness extended into the start of this year as households and businesses were being cautious about spending.
Treasury said the cost of the quake was likely to be two to three times greater than that of the $5b September quake.
``Allowing for some double counting for cases where prior damage has been compounded, we estimate the combined financial cost of the two earthquakes at around $15b.''
Finance Minister Bill English said paying for the earthquake was likely to involve ``a bit more borrowing in the short term'' and reprioritising spending.
He said early estimates were a loss of $3b to $5b in tax revenue over the five years.
``This is manageable in the context of the Government's revenue base of about $330 billion over the five years.
``It's clear that the earthquake will have an impact on the Government's finances - through both increased costs and reduced tax revenue.
``We will work through those issues carefully as we prepare for the Budget over coming months,'' Mr English said.
Treasury said unemployment rates were unlikely to fall significantly over the next six months but the earthquake recovery may provide longer term additional employment.
A current account surplus was expected in March for the first time since 1973. The temporary surplus reflected higher current transfers from September to March because of reinsurance payments related to the quakes.
The current account deficit would return in 2012 partly due to the country's overseas debt and higher interest rates.