Further rate cuts don’t look likely

Doubts are growing that the Reserve Bank will cut its interest rate below 1 per cent in November.

The change in mood is positive for savers but means even lower mortgage rates may not be just around the corner.

The Reserve Bank wrongfooted financial markets in August when it lopped halfa-percentage point off the Official Cash Rate, helping fuel speculation the rate could fall below zero if economic conditions deteriorated further.

Most analysts had been confident the bank would cut rates again on November 13, and probably also in February and May next year, taking the cash rate down to 0.25 per cent.

But a speech by Reserve Bank assistant governor Christian Hawkesby in Sydney on Monday has resulted in more secondguessing.

Hawkesby said the August rate cut was based on analysis by the bank that suggested it should deliver about a 60 basis point stimulus ‘‘over the next 12 months’’.

His speech appeared to cast the rate cut decision in terms of bundling together the 25 basis-point cuts that analysts had previously expected in August and November into an early hit.

BNZ research head Stephen

Toplis said the Reserve Bank was ‘‘starting to sound less than committed to another cut next month’’.

Hawkesby’s speech reiterated recent messages from the bank about August’s 50 point cut being ‘‘a front-loading of stimulus’’, he said.

‘‘This follows his comments from last week that he was ‘very happy’ with the way interest rates cuts are feeding through the economy.’’

But Toplis called on the bank to be ‘‘more explicit’’ if it wasn’t comfortable with the market still pricing-in a November rate cut.

‘‘Otherwise it’s coming across as the bank starting to hedge its bets,’’ he said.

The pressure for a further rate cut appeared to reduce earlier this month, when Statistics NZ reported a 0.7 per cent increase in consumer price index in the three months to the end of September.

That was slightly higher than most analysts’ forecast of a 0.6 per cent rise.

However, Statistics NZ confirmed the inflation rate would have come in at the expected 0.6 per cent had it not been for its estimate that domestic airfares jumped by almost 16 per cent from the June quarter.

Air New Zealand said the increase reported by Statistics NZ was ‘‘much higher than what our own data suggests’’, and Kiwibank senior economist Jeremy Couchman described it as a ‘‘surprise’’.