The New Zealand Reserve Bank meets on Thursday to discuss monetary policy and the emerging question, should there be a rate cut to soften the growing financial impact of the Christchurch earthquakes?
NZ economists have been speculating that the Reserve Bank will cut the official cash rate by half a per cent to 2.5% at next Thursday’s meeting because of the impact magnitude 6.3 earthquake last week.
The news will be welcomed by a lot of people across the ‘ditch’ not least the Australian companies operating over there which are facing tough times.
From Fairfax, to Westpac, the NAB, Commonwealth and ANZ banks, Woolworths, APN, QBE, IAG, Harvey Norman, the AMP and a host of other groups, the outlook for their businesses for the next year is bleak because of the sluggish economy and now the impact of the quake.
For their Australian parents their NZ arms look like being another drag on earnings, with a strengthening in the value of the Australian dollar this week adding to the pain.
But a rate cut would relieve some of the pressure.
Before the second quake (or aftershock) a week ago last Tuesday, the belief in the markets that the RBNZ would not move on rates because the economy was hovering on the brink of recession after growth fell 0.2% in the December quarter.
Since the quake hit, major banks have dropped their housing rates. BNZ (NAB), ANZ NZ, Westpac, ASB (CBA), and TSB, and Kiwi Bank have all changed some of their fixed rates, but many have left the floating rates unchanged.
The total cost was estimated this week at $NZ15 billion by Prime Minister John Key. With the cost of the first quake at $6 billion, NZ is looking at a nasty growth crimping bill.
That could push the cost to all insurers be $NZ12 billion or more, or more than double the insured loss for the September quake.
Finance Minister Bill English said the quake could see the economy left with very little growth in it over the next 18 months.
"June-to-June could be close to zero growth," he told Radio New Zealand.
And the quake could cost NZ 7% to 8% of GDP, compared to Hurricane Katrina’s 01%, according to estimates by some analysts this week.
Some estimates say that out of the ballpark $NZ20 billion cost, the government will foot around $NZ5 billion, minus the other costs yet to be assessed as revenue falls while Christchurch recovers.
Insurers will pay heavily with giant reinsurer, Swiss Re, estimating this week that the earthquake would cost insurers between US$6 billion ($8.1 billion) and US$12 billion ($16 billion).
"The total insured claims for the insurance sector for the earthquake in New Zealand are estimated to be between US$6 billion to US$12 billion," said the reinsurer.
Swiss Re added that the quake was expected to cost it $US800 million before tax.
It cautioned that there remained uncertainties in its estimates and that the preliminary forecasts could yet be revised.
Remarks on Wednesday by Mr Key which seemed to be in support of a rate cut, saw the Kiwi dollar fall sharply, losing a cent. In fact it traded down to a new 10 year low against the Australian dollar of $A0.7385, the lowest since mid-2000 and was around that level last night.
The RBNZ meeting will come as more and more economists in NZ downgrade their growth and other forecasts.
The New Zealand Institute of Economic Research this week chopped its forecast for 2011 to almost nothing because of the impact of the quake and the mixture of sluggish demand and rising petrol, oil and food prices.
The NZIER now believes the economy will grow only 0.3% in 2011, down from its earlier forecast of 2.3%.
“The recovery has been deferred. We have revised down our 2011 growth forecast from 2.3% to 0.3%.
"Around half of this revision is from underlying weakness in the economy, which will be compounded by a synchronised spike in food and fuel prices.
The other half is due to the devastating earthquake in Canterbury” NZIER’s Principal Economist Shamubeel Eaqub said.
"We expect the RBNZ to hold the OCR unchanged at 3% through 2011. There may be a need for rate cuts, but the RBNZ should fully assess the economic fallout before doing so.
"Around half this revision is from underlying weakness in the economy, which will be compounded by a synchronised spike in food and fuel prices," said the institute’s principal economist, Shamubeel Eaqub, who warned that forecasting was particularly difficult at present.
"We are seeing unprecedented levels of uncertainty and disruption, partly from Canterbury, and partly from the sheer length of time this recession has dragged on."
Even so, NZIER suggests that a Reserve Bank interest rate cut would achieve nothing because interest rates are already very low, and the Christchurch earthquake cannot be fixed through monetary policy.
"Canterbury’s problem is not interest rates," said Mr Eaqub.
"Lower rates will not fast-track safety checks, insurance assessments and payments, or rebuilding.
"At best it may provide a temporary boost to consumer and business confidence.
"We believe it would be better for the Reserve Bank to wait and assess the situation," he said.
And New Zealand is seeing a boost to its terms of trade and national income like Australia is.
The improvement
