Time for an interest rate cut

Time for an interest rate cut

Both the timing and the environment are right for a cut in interest rates, says Business NZ.

The Reserve Bank reviews the official cash rate next Thursday 24 April.

Business NZ Chief Executive Simon Carlaw says a quarter or even half per cent could be shaved off interest rates, to ensure a 'soft landing' next year.

Mr Carlaw says there are nine reasons to cut the official cash rate:

* The Consumer Price Index for the March quarter (0.4%) was below market expectations and has resulted in the annual CPI falling from 2.7% for the year ended December 2002 to 2.5% for the year ended March 2003.

* Annual inflation is now comfortably inside the Reserve Bank's 0-3% target.

* Business confidence has fallen sharply to its lowest level since 1985, which is likely to impact negatively on intentions to invest and employ.

* There is widespread uncertainty over energy supply, and hardship being experienced by many firms exposed to high spot electricity prices.

* Exports are weak and commodity prices have continued to fall in NZ$ terms, with the ANZ Commodity Price Index 28% below its peak in April 2001.

* The domestic economy is showing signs of slowing, e.g. building consents falling in January and February, and patchy retail sales.

* Drought conditions in some regions will impact on farm returns over the next year.

* The international economic outlook remains negative (continued geopolitical uncertainty, weaker economic prospects for the US, Japan, and Europe, and the impact of the SARS virus on international trade and tourism).

* The Reserve Bank said on 23 January that a cut in the Official Cash Rate might be warranted if the NZ$ stayed on or above current levels. It has - as of 16 April the NZ$ has appreciated 2.4% against the US$, fallen 1.3% against the AU$ (which was needed as it was getting overvalued), and overall is slightly higher on the Trade Weighted Index (60.9 versus 59.6 - up 2.2%).

"The balance of probabilities has turned towards the pessimistic, and with inflation lower than expected, a 25 or even 50 point pre-emptive reduction would be justified," Mr Carlaw said.

ENDS

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