RBNZ should hold off making a big OCR cut until June, Fed Farmers says

Federated Farmers said that the Reserve Bank should hold back on making a big cut in the Official Cash rate until June, giving it more time to asses the economic impact that swine flu may have, as well as the effectiveness of the latest round of tax cuts and the May budget. However, the Federation said it thought there was scope for a 25 basis point cut in the OCR to 2.75% on April 30, which "may be the last cut before the OCR goes on hold", as inflationary pressures diminish. "New Zealand's fiscal stimulus for the current financial year and into the next one is close to five percent of gross domestic product. The OECD has expressed caution at this level, so it makes little sense to continue deep cuts to the OCR until the impact of this stimulus is fully fed into the economy," Federated Farmers economics and commerce spokesman Phillip York said. "This does not take into account other stimulus measures that might emerge from next month's Budget," York said. Although inflation was "seemingly under control", Federated Farmers pointed to domestic, or non-tradables inflation as being the biggest inflationary risk to the economy and the Reserve Bank. It especially targeted proposed rate increases by councils around the country. 'Non-tradables' are goods and services that do not face foreign competition. In the March quarter, non-tradables inflation was 3.8% from a year ago, still outside the Reserve Bank's 1%-3% target ban. It fell from 4.3% in the December quarter. "It has to be remembered that inflation, while down, could easily roar back into life if councils lose the plot and run with inflation busting rates increases," York said. "There are 60 council plans the Federation is submitting on and some of the proposed rates increases are alarming," he said. "Federated Farmers hopes Dr Bollard will use Thursday to warn councils and government departments to be prudent, keeping any increases as close to zero as possible. More so as long term interest rates have been trending upwards and not downwards despite cuts to the OCR."