11 Sep 2015

More cuts likely but no recession - Wheeler

11:39 am on 11 September 2015

The hit to incomes from lower dairy prices and the flow-on effect into weaker spending and investment has the Reserve Bank considering one more cut to the official cash rate.

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Photo: 123rf.com

The central bank cut rates for the third successive time yesterday, from 3 percent to 2.75 percent.

Reserve Bank governor Graeme Wheeler said economic growth had slowed to about 2 percent due to lower dairy prices, the plateauing of construction activity in Canterbury and weaker confidence.

Mr Wheeler said another cut was likely in the near term, but he insisted there was enough support for the economy to keep growing and avoid the possibility of recession.

He said growth was underpinned by robust tourism, strong immigration and the large pipeline of construction activity in Auckland, while a falling dollar and lower interest rates would also support activity.

"We're got forecasts of 2.5 percent and then 3 percent in the next couple of years."

Mr Wheeler said for a recession to happen, conditions would require a severe El Niño event or China's economy slowing sharply.

"The big risk out there, other than El Niño - if that really did develop - is what's happening with the Chinese economy, and there's quite a lot of uncertainty around that."

Mr Wheeler said the Reserve Bank had the interest rate ammunition to respond if need be, while the Government had the fiscal headroom to also support activity.

Economists remain divided on the Reserve Bank's next move.

Some analysts remained convinced Mr Wheeler was now on hold, some expected another cut in October, while others were picking he would delay until March next year.

And the prospect that rates could fall to 2 percent was not being ruled out.

Infometrics' Benje Patterson said, given the uncertainty about global growth, Mr Wheeler should not wait.

"Some think this (stock market) volatility is indicative of weaker demand internationally and that's put downwards pressure on commodity prices. We think the Reserve Bank should act on these concerns now, rather than waiting and seeing it play out further. It's better to be ahead of the curve rather than playing catch up later."

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