NZ interest rates predicted to steady

By Phil Boeyen, ShareChat Business News Editor

Friday 5th January 2001

Financial institutions are picking a steady course for New Zealand interest rates over the first half of the year following this week's rate cut by the US Federal Reserve.

Deutsche Bank is predicting US interest rates will be dropped again at the end of January following yesterday's half percent cut, and believes the Reserve Bank here will take heed of the US move and leave rates unchanged at its January review.

This is despite the Reserve Bank's December statement which saw a need for the cash rate to rise substantially over the next 12 months to keep inflation at bay.

Deutsche Bank says at the time the Reserve Bank downplayed the risks facing New Zealand from a possible global slowdown, however the risks of a weaker global economy seem to be coming home to roost more quickly than seemed likely a month ago.

"While the RBNZ may believe the NZ business cycle is out of sync with the rest of the world, it will no doubt be aware that NZ has never been able to shrug off a significant negative external shock. The impact of the Asian slowdown should spring readily to mind."

Deutsche Bank says the rise in the New Zealand dollar and the fall in oil prices also ease some of the pressure the RBNZ may feel to tighten interest rates.

However Deutsche Bank is not eliminating a rate rise altogether and says "at this stage we still think the next move in NZ rates is up - but perhaps not as soon as looked likely at the end of last year."

Another financial institution, HSBC, is also picking the RBNZ will hold its Official Cash Rate in its January statement rather than tightening, but goes further to predict a rate cut by June.

"By the time of the next Monetary Policy Statement on March 14, the opportunity for any further rate tightening will well and truly have passed. The Fed will have cut the Fed funds rate by 75 basis points, with another easing expected at the March FOMC meeting.

"The RBA will have started to cut official Australian rates, most likely after its 6 March board meeting. Lower oil prices and the stronger New Zealand dollar will mean that annual inflation is set to fall well below 3% through 2001. In such a climate it would be very difficult even for the hawks at the RBNZ to justify higher interest rates."

HSBC says it expects official interest rates to be at least 100 basis points lower (down to 5.50%) by year-end

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