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