12 Jun 2012

Spain bailout reduces NZ rate cut probability - analyst

7:23 am on 12 June 2012

An analyst says Spain's €100 billion rescue package is likely to ease market expectations of interest rate cuts by New Zealand's Reserve Bank.

The Reserve Bank will make its latest Official Cash Rate rate decision on Thursday and analysts expect it remain at 2.5%, its record low.

On Saturday, euro zone finance ministers agreed on major loans to Spain's banks which have been hit by bad property loans.

Harbour Asset Management director of fixed interest Christian Hawkesby, says the size, speed and international co-ordination involved in the deal to shore up the struggling banks is encouraging.

Financial markets are pricing in up to 0.5% of interest rate cuts from the Reserve Bank this year on the chance of the European economic crisis escalating, but Mr Hawkesby says the Spain rescue deal reduces that probability.

"To the extent that this package reduces that chance we're likely to see the market refocus their view on the next move from the Reserve Bank, which is likely to be more closely linked to the speed of the Christchurch rebuild and more likely to be of an upward direction some time next year."

But Mr Hawkesby warns there are still many hurdles that could undermine the market's cautious optimism, particularly the outcome of Greek elections being held this weekend.

Shadow board favours keeping rates on hold

A group of economists, academics and business leaders favours the Official Cash Rate remaining at 2.5% but has given greater weight to a cut being the right move, given Europe's debt crisis.

The Institute of Economic Research's nine-strong Shadow Board, which is independent of the Reserve Bank, asks each member to put a percentage value on how much they prefer each interest rate. The results are then aggregated to form a collective view.

Since the last survey in April, the board has raised the chance, to one third, of a lower cost of borrowing being needed.

The institute says that reflects higher global economic risks, particularly in Europe, the economy moving sideways, difficulty in reaching a budget surplus by 2015 and low inflation. The chance of a rise fell to 3%.