BNZ Weekly Overview January 29 2009

Welcome to the January 29 2009 issue of the BNZ Weekly Overview.

The Reserve Bank generally exceeded market expectations this morning by cutting the official cash rate 1.5% down to 3.5%. Given the strong emphasis the RB placed on the situation offshore and the fact that things internationally continue to deteriorate on a weekly basis we think scope now exists for the cash rate to eventually bottom out at 2% in the middle of the year. This implies further downside risk for all wholesale interest rates and therefore mortgage interest rates so the time does not yet seen at hand for homeowners to shift from floating or fixing six months out to longer term rates.

That point is probably going to be reached before the middle of the year and it will be interesting when we think rates are at the bottom to then try and guess how quickly they could bounce up if stimulatory measures offshore and continuing bank bailout packages do start to produce some light at the end of the economic tunnel for the world economy late this year.

In the Weekly Overview this week we have a general run-through of the New Zealand economy's performance recently and the positive and negative factors in play over the coming 12 to 18 months. In the housing section we consider the recent proposal by a business lobby group for a capital gains tax on housing - which was quickly rejected by the government.

In the foreign exchange section we discuss the 1.5 cent fall in the Kiwi dollar after the Reserve Bank's rate cut and suggest further downside risk exists for the Kiwi dollar partly because of the risk our current-account deficit becomes much worse. It pays to note however that the Kiwi dollar is already at very low levels against the euro and Japanese yen and exporters might want to watch they do not get too greedy hanging out for lower levels before putting on some strong medium to long-term hedging.

WOJan29.pdf

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