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Economic slump may herald string of rate cuts in 2009

Monday 7th July 2008

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New Zealand's economic slump means the central bank may embark on a series of interest-rate cuts that extend through to the end of 2009, some economists say.

"For borrowers, this suggests the opportunity to lock in fixed rate borrowing at lower levels is likely to present itself in coming quarters," Bank of New Zealand economists said in their June financial wrap last week.

"We are currently forecasting a relatively aggressive easing cycle," they said.

Helping firm up economists' rate cut expectations may be the New Zealand Institute of Economic Research's Quarterly Survey of Business Opinion, scheduled for release tomorrow. Confidence fell to a 33-year low in the first quarter, when the economy contracted.

"We fully expect activity indicators to be weak" in the latest QSBO, said Shamubeel Eaqub, head of research at Goldman Sachs JBWere.

Also this week, the Real Estate Institute of New Zealand releases its house sales data for June. Last week, real estate firm Barfoot & Thompson reported its average sales price in June fell 1.7% from May while new listings dropped 19% year on year.

Eaqub said national sales will probably follow Auckland's, though "we think this is only the first leg of the correction process and the impact on prices, household spending and residential construction are still to be seen."

Last week, state-owned Kiwibank cut its three, four and five-year fixed-rate home loans to below 9%, making them the lowest in a survey by the Good Returns web site.

Bank of New Zealand said the "crumbling housing market and slow-down in consumer spending is translating into slower economic activity," predicting a 0.2% contraction in second-quarter GDP.

"Our official forecasts have the central bank cutting 25 basis points to 8% in September and easing 25 basis points at every subsequent meeting, right through 2009," the bank's economists said.

By Jonathan Underhill

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