Earthquake may force Bollard’s hand
Economists are revising their outlook for the economy following yesterday's devastating earthquake with expectations the Reserve Bank may have to cut interest rates.
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Economists are revising their outlook for the economy following yesterday’s devastating earthquake with expectations the Reserve Bank may have to cut interest rates.
The second major earthquake to hit Christchurch in five months will be another “devastating blow to an economy struggling to gather steam,” said Katrina Ell, associate economist at Moody's Analytics.
While the September earthquake was expected to add about $5 billion (2.6%) to nominal GDP over time, the disruption to production and commercial activity had an immediate effect on business and consumer confidence.
“Tuesday's tragic events could exacerbate this trend, condemning the New Zealand economy to another year of anemic growth due to forces beyond its control,” Ms Ell said.
The rate markets reacted to the quake yesterday pricing in interest rate cuts over the next two meetings.
TD Securities head of Asia-Pacific Research Annette Beacher said Reserve Bank governor Alan Bollard should cease his tightening bias, noting that Finance Minister Bill English referred last week to the “possibility” that the economy slipped back into recession at the end of 2010.
“Although it is too extreme to expect that he will cut the policy rate as a result of this event alone, that is a possibility,” Ms Beacher said.
“Regional disasters are better dealt with looser and targeted fiscal policy than the broad instrument of looser monetary policy.”
JP Morgan’s Helen Kevens said although a rate cut in response to yesterday’s earthquake was possible, it was not warranted at this stage.
“The RBNZ will stay on the sidelines for an extended period while officials assess the impact of the earthquake and other recent information on the economy … the resumption of the tightening cycle now looks likely to be delayed until 2012.”
Television footage of yesterday's magnitude 6.3 quake suggested much more damage, as well as causing deaths, than the September earthquake.
“Already fragile confidence will take another hit, businesses will be closed, and many of the 25,000 workers in the centre of the city will be left unable to work for days, weeks or even months,” Ms Kevens said.
NBR staff
Wed, 23 Feb 2011
Wed, 23 Feb 2011
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Earthquake may force Bollard’s hand
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