RBNZ expected to cut rates

Reuters | Friday, 05 September 2008

The Reserve Bank is expected to cut interest rates for the second consecutive time next week to help support an economy widely seen to be in its first recession in over a decade, a Reuters poll shows.

The central bank cut its official cash rate by 25 basis points to 8 percent on July 24, its first easing in five years,ll track verifies that," said Craig Ebert, senior economist at Bank of New Zealand.

The central bank closely follows the 90-day bank bill rate as a measurement of monetary conditions. Its forecast of the bill is seen as a key indicator of the official cash rate.

New Zealand's interest rates, among the highest of countries in the Organisation of Economic Co-operation and Development, was a key driver in lifting the New Zealand dollar to a 23-year high earlier this year.

The currency has lost about 10 percent against the US dollar since the July rate review, hitting a 22-month low on Friday, as investors turned to other high-yield currencies such the South African rand the Brazilian real.

All but one of the 17 economists in the Reuters poll expected the central bank to cut rates to 7.75 percent on Sept. 11. One predicted a 50 basis-point cut.

Data last month showed retail sales fell at a record pace in the June quarter as consumers cut back on their spending in the face of soaring costs, cementing views that the economy fell into its first recession since 1997-98.

"There is little doubt that monetary policy needs to be neutralised, but we do not think the RBNZ is ready to cut rates aggressively just yet," said Shamubeel Eaqub, director of investment research at Goldman Sachs JBWere.

He said the central bank will avoid cutting rates too quickly amid continued inflation risks, after an aggressive easing in 1998-99 led to a rapid reflation.

The annual inflation rate hit a two-year high of 4 percent in the second quarter on higher food and oil prices and is expected to be near 5 percent in the third quarter.

The RBNZ, which is required to keep inflation within 1-3 percent over the medium term, forecast in June that annual inflation would fall back within its target band in early 2010 as the economy slows.

Another factor which may keep the central bank cautious about easing aggressively is the weakness in the New Zealand dollar, which could add to inflationary pressures through import prices, such as for oil.

The central bank said in July it expected to ease policy further unless the New Zealand dollar depreciated excessively.

The New Zealand dollar's trade-weighted index, the central bank's preferred measure of the exchange rate, has fallen about 5 percent since the July 24 review.