Disruption to the economy following the Christchurch earthquake should prompt the Reserve Bank to cut the official cash rate by 50 basis points, says ASB economist Jane Turner.
The economy was already feeling the effects of the earthquake, with one and two-year interest swap rates falling 30 basis points since Thursday morning, and the exchange rate similarly under pressure and down to US74.2, before rebounding yesterday to trade around US75.5Add to the mix rising oil prices due to political unrest in the Middle East and Ms Turner said key economic indicators were under pressure.
She saw a lowering of the official cash rate as a "state of emergency setting" and some insurance for the uncertainty that may lie ahead.
"At a time of national crisis when the underlying economy is already proving frustratingly weak, a rate cut would potentially be very helpful to the recovery of the economy," she said.
The Reserve Bank was likely to announce a 50 basis point cut at its March 10 meeting, if not sooner.
This week's earthquake, variously estimated to have caused damage ranging from $8 billion to $16 billion, would create a far greater economic disruption than September's jolt, she said, due to the extent of damage to infrastructure and the central business district.
While insurance would cover some of the cost, she said private and public funds would be needed by the Canterbury region.
"The cost to the Government is likely to be much larger [than September's event] at a time when the economic backdrop is posing problems to the Government in meeting its budget.
"Fiscal policy is likely to find itself in a position where it may be tighter than ideal for the broader economy and monetary policy can provide some offset."
Ms Turner said the Reserve Bank had already signalled a possible easing should domestic conditions deteriorate and that had been the case, with economic activity stalling in the second half of last year, the economy retracting in the third quarter, the labour market slowing and indications that inflation pressures were easing.
"Overall, the patchiness of the underlying activity in the New Zealand economy, means that continued monetary policy stimulus is appropriate. The latest Canterbury earthquake adds to this uncertainty and suggest lower interest rates would be helpful to the recovery of the economy.'
