By Alex Tarrant
New Reserve Bank Governor Graeme Wheeler should cut the Official Cash Rate from its record low 2.5% on October 25, Business NZ says.
The call comes as market participants are almost fully pricing in a 25 basis point cut in the OCR to 2.25% sometime in the year ahead. See more here on our site from BNZ economists.
New Zealand bank economists have been pushing out their expectations for when the Reserve Bank will next move on the OCR - they're still expecting the next move to be a hike - from mid-2013 to the end of the year, or even into 2014.
Radio NZ reported this morning Business NZ CEO Phil O'Reilly calling for the cut after the Reserve Bank of Australia cut its benchmark rate by 25 basis points to 3.25% on Tuesday. The RBA cut weakened the Australian dollar, boosting the New Zealand dollar to a one-year high above 80 Australian cents on Tuesday.
From Radio NZ:
Business NZ says there's no doubt manufacturers are struggling and the bank should follow the lead of the Reserve Bank of Australia, which lowered its rate on Tuesday to 3.25%.
Business NZ chief executive Phil O'Reilly says it's not necessarily about trying to take pressure off the dollar, but the Reserve Bank does have to take into account that the economy is slowing.
However, he does not believe the bank should try to manipulate the dollar.
Weaker second-half growth
The call from Business NZ comes as economists and Treasury pick weaker economic growth in the second half of the year than in a surprisingly strong first half, which was put down largely to good growing conditions for the agriculture sector and construction activity.
In its latest Monthly Economic Indicators released on Monday, Treasury said that despite a softer outlook for the rest of calendar 2012, a combination of factors should continue to support growth in the near term.
"The Canterbury rebuild is gathering pace, prices for our commodity exports appear to have reached a floor, and increased housing market activity should support consumer spending on big-ticket items too," Treasury said.
"However, the outlook is not without its headwinds and risks, with parts of the economy looking to have lost some momentum over recent months, the risks for agricultural production mainly on the downside, and ongoing concerns over the international economy," it said.
"All told, the risks to our Budget forecast of 0.6% quarterly GDP growth in the September quarter lie on the downside."
Looking patchy
Westpac economists said on Monday that September finished with another round of patchy indicators for the New Zealand economy, extending the evidence of a softer performance over July and August.
"That said, we wouldn’t want to overstate this trend. The weight of evidence still points to positive growth, although the surprisingly strong 1.6% GDP growth in the first half of this year will be difficult to replicate in the second half. And the data is telling us at least as much about the two-speed nature of the economy," Westpac economists said.
Exports are clearly at the tougher end of the spectrum at the moment. The August merchandise trade balance showed the legacy of weaker export prices over the last year, with the New Zealand dollar failing to provide a buffer. The monthly trade deficit of $789m (not seasonally adjusted) saw the annual deficit widen to $866m, the worst since late 2009.
While the widening deficit is unwelcome, we’d be careful of reading too much into it about the state of global demand, particularly for our two largest trading partners Australia and China. Exports to Australia are down compared to last year, but much of the drop can be traced to the extractive industries – oil and gold – which ship to Australia for refining, not because that’s where the demand is. Outside of these groups, the trend for exports is broadly flat rather than falling.
As for China, there has been a notable pickup in exports in the last few months. Part of this reflects a sell-down of dairy products that were stockpiled as a result of last season’s excellent growing conditions (production was up 11% on the previous season). But non-dairy exports (mostly primary products, such as wood), which make up about two-thirds of our exports to China, have also shown some recent improvement. We emphasise that China’s slowdown – and the recent stimulus measures to combat it – have both been highly selective, affecting New Zealand’s ‘soft’ commodity exports in a different way to Australia’s ‘hard’ commodities.
In contrast to exporters, the construction sector is clearly poised to outperform as the post-quake recovery in Canterbury gathers momentum. Residential building consents rose 1.9% in August, and were up 4.3% excluding the lumpy apartments component. Notably, the strongest growth for the month – and indeed over the last year – was not in Christchurch City but in the Waimakariri district, which was hit hard by the September 2010 earthquake but less so in February 2011. This is testament to the drawn-out nature of the rebuilding process; the vast majority of the work in Christchurch still lies ahead of us.
It’s also notable that consents in the Auckland region have been weaker over the last three months, despite the clear evidence that a lack of new supply, combined with rising incomes and population growth, is squeezing house prices higher (the REINZ’s stratified price index for August was up 11.5% on a year ago). We’re on alert for signs that the Canterbury rebuild might be draining resources from other regions, which could re-stoke inflation pressures.
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