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Economists unanimous on rate cut

Friday 15th August 2008

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Four weeks out from the next monetary policy statement on September 11, economists are unanimous they expect Reserve Bank governor Alan Bollard to cut rates again.

All 12 economists surveyed by Good Returns are expecting Bollard to cut the official cash rate (OCR) from 8% to 7.75%.

Last month, Bollard cut the OCR from 8.25% where it had sat since July last year. It was the first time he had cut rates since July 2003.

Donna Purdue at Westpac says the market read last month's cut as "a green light that they're going to continue to cut for the rest of the year."

In part, Bollard was trying to offset the impact of rising bank funding costs as a result of the global credit crunch and the risk banks would pass those higher costs onto consumers and businesses.

Purdue says she doesn't think Bollard will be all that concerned about the recent decline in the New Zealand dollar if it remains about current levels. The trade weighted index is only about 4% lower than the Reserve Bank's forecast in June and it would probably take a 10% to 15% decline to cause Bollard to consider not cutting rates again, she says.

Robin Clements at UBS New Zealand says if the Reserve Bank doesn't cut rates in September, the currency would probably rise again. "To do nothing would defeat the purpose," he says.

Among data released since the last OCR cut, manufacturing bounced back slightly in July from a very weak June result but remained in decline, employment jumped 1.2% in the June quarter but was seen as correcting the March quarter's 1.3% decline, and the unemployment rate rose to 3.9% from 3.7%.

In addition, Treasury said it believes the economy shrank in the June quarter as well as the March quarter, putting the country in recession.

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