16 Oct 2012

Rate cut has become more likely - economist

7:44 am on 16 October 2012

An economist says an interest rate cut is more likely after the latest figures showing the service sector has contracted for first time in two years.

The September BNZ - Business New Zealand performance of services index slid a fraction of a point to 49.6 from August's seasonally adjusted reading of 50.

The sector includes all service industries such as banks, accommodation, hospitality, transport and health. A reading below 50 indicates it is shrinking.

BNZ economist Doug Steel says a weak services sector, which makes up more than two thirds of the economy, points to a sharp slowing of economic growth.

He says it is unlikely agricultural production will pick up the slack of other industries in the second half of the year.

Mr Steel says the BNZ has pared back its forecast of economic growth in the three months to September from 0.5% to 0.3%.

He says a host of negative indicators, including expected weak inflation figures, raises the chances of a cut to the Official Cash Rate by the Reserve Bank.

However, he says there are still positive signals in the economy.

"We still have a housing market that's gaining momentum, credit growth picking up and the like that will just stay the Reserve Bank's hand for now."

The index shows three of five main sub-indices contracted. Activity and sales shrank for the first time since last December, while employment and supplier deliveries contracted.

Stocks and inventories, measuring nearly 53, led the way for the first time in nearly four years, and new orders remained above 50 but recorded their fourth consecutive fall.