Central bank needs to cut rates further

By Paul McBeth

Friday 17th April 2009

The Reserve Bank of New Zealand needs to focus on cutting interest rates further to revive an economy predicted to contract 2.8% in 2009, according to a report by the Organisation for Economic Cooperation and Development.

New Zealand's policy makers have moved "aggressively" to support domestic demand, the report noted, with the central bank slashing 5.25 percentage points from the official cash rate to a record-low 3%. Governor Alan Bollard has room to cut the OCR to 2%, but needs to "start raising rates once a recovery is clearly underway," the OECD said. Risks to New Zealand's credit rating and market confidence, along with the nation's heavy dependence on foreign debt limited the government's ability to provide fiscal stimulus.

"The Reserve Bank still has room to go further in responding to deteriorating economic conditions," the report said. "Monetary policy should take priority over fiscal policy, because the OCR is still well above the zero lower bound."

Government figures today showed the consumer price index eased to 0.3% in the first quarter, for an annual rate of 3%, at the top end of the central bank's target range, which may give the bank more comfort in cutting rates further. A survey of nine New Zealand investment managers by fund manager Russell Investments found the majority expected some pick up by the end of the third quarter.

Most of the surveyed managers said New Zealand equities were marginally undervalued, but saw opportunities in good-quality stocks in the long-term. The response to the bond market was mixed, while cash was not favoured for the next 12 months and property was "still unpalatable to most".

The NZX 50 Index has gained 4% in the past ten days. Ten-year bonds rallied from mid-November through to late-January where the yield fell to 4.25 from 6.09. Since then yields have increased to 5.27.

The rate on one-month bank bills has mirrored the Reserve Bank's series of cuts to the OCR, tumbling to 3.3% today from over 8% in early October. Property prices fell 9.3% in March, following an 8.9% decline in February, according to the QV Valuations report, which calculates the figure over a three-month period compared to the previous year.

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