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Rate cut unlikely this week

Monday 21st April 2003

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While the Reserve Bank isn't expected to cut interest rates just yet, most economists now think a rate cut is imminent.

Reserve Bank governor Alan Bollard will announce his latest decision on whether to move the Official Cash Rate (OCR) on Thursday. The OCR has stood at 5.75% since July last year and is the highest among industrialised countries.

Macquarie Bank thinks it will be Bollard's hardest call yet since his appointment in August last year.

It questions whether the central bank is really taking a more growth tolerant approach in line with the new Policy Targets Agreement Bollard and Finance Minister Michael Cullen signed last year.

"The time is approaching for the RBNZ to look through short-term inflation prospects and act by cutting interest rates to stimulate real GDP growth," Macquarie says. Economists now expect annual economic growth will slip below 3% this year compared with 4.4% last year.

Both the New Zealand dollar and inflation are now at or below the central bank's expectations and so shouldn't be as much of a concern, according to ANZ Bank. While previously among the more hawkish, its economists now estimate there's a 40% chance of a rate cut on Thursday.

It and National Bank note the likely dampening impact of the SARS virus on the international economy and ANZ thinks fears about the domestic electricity supply could also slow growth further.

"As things stand at present, uncertainty and the downside risks to the growth outlook are significant," ANZ says.

One of the risks though is the possibility of the housing market overheating. Figures last week showed migration remains strong: the nation gained a net 3,650 permanent and long-term residents in March and a net 41,230 in the year ended March, adding more than 1% to population growth.

Deutsche Bank chief economist Ulf Schoefisch says that because there's a significant backlog of immigrant applications, the net inflow should continue at current levels for most of this year.

He thinks Bollard will start cutting rates soon, but gives only a 30% chance that he will start this week.

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