Economists expect 50 basis point OCR cut

Thursday 24th February 2011

ASB and the Deutsche Bank expect the Reserve Bank to deliver a 50 basis point cut in the Official Cash rate (OCR) to 2.50% at the March 10 meeting - if not sooner.

Over the past two days the markets have also moved to price in a reduction in the OCR, by a lesser amount of 25 basis points. However, BNZ, ASB and ANZ expect the OCR to remain on hold till late this year or early 2012.

ASB economist Jane Turner says the personal, economic and financial ramifications for the entire economy from the February 22 earthquake are becoming increasingly severe as more information comes to hand.

"At a time of national crisis, when the underlying economy is already proving frustratingly weak, a rate cut would potentially be very helpful to the recovery of the economy."

Turner says prior to the earthquake, the Reserve Bank had already flagged the possibility of an OCR decrease over this cycle if domestic conditions continued to deteriorate.

"This followed a raft of underwhelming data, which indicated economic activity stalled over the second half of 2010."

The Deutsche Bank says it sees little point in the small reduction the market has priced in and therefore it expects a 50 basis point cut to be made to provide greater assurance that the forecast recovery remains on track despite the tragic events in Christchurch.

"In our view it is clear that the Government must take the lead in responding to this disaster, but we think monetary policy can - and should - also play a small role."

The Deutsche Bank expects the Reserve Bank to also emphasise that it will remain focused on medium-term underlying inflation pressures.

It also expects there to be a reminder that policy will likely need to be tightened in due course as the economy eventually returns to trend, especially with the stimulatory rebuild in Christchurch now certain to be even greater in 2012 and beyond.

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