OCR cut called for, along with fiscal response in NZ

As early estimates of the extent of damage caused by the Christchurch earthquake start pouring in, economists believe a fiscal response from the Government may have to be supplemented by a rate cut by the Reserve Bank of New Zealand.

A rate cut would have to be no less than 50 basis points, they say.

ANZ economists believe there is justification to cut the Official Cash Rate by 50 basis points, with a least 25 basis points of this coming out of the March policy.

"Monetary policy plays second fiddle to fiscal policy in events like this, but should still do its part," ANZ economist Khoon Goh is reported to have said.

According to Goh, prior to this, a fiscal policy and aid on the ground will need to do most of the work.

Citigroup economists favour more emphasis on fiscal policy. "Any cut in the OCR would need to be fairly large (at least 50 bps) with an accompanying cut in lending rates from the mortgage banks for this to be effective," Citigroup said, in a research note. Citigroup economists believe an effective fiscal policy would be a better immediate policy response to the earthquake.

Bank of New Zealand economists note the calls being made for a 50-basis-point cut in the OCR but believe this may not be the right tool.

"While it would not exactly be wrong for the bank to cut the OCR, there are numerous, more effective ways of directly helping the Christchurch economy - economically and financially - which don't run the risk of adding to inflation issues for the nation as a whole," BNZ said, in its note.

ASB economists believe there is a 35 per cent chance of a 50-basis-point cut in the OCR, but say the cut would be more a response to signs the wider economy is flagging - or to give some confidence-restoring reassurance.

"Targeted support would be the most effective way of financially helping Christchurch people and businesses - as it was after the September earthquake," the economists wrote.