By Duncan Garner
The Reserve Bank Governor has little option but to cut interest rates on Thursday.
The Official Cash Rate is at 3%. Many of the experts think it will come down to 2.5%.
It will drop the cost of borrowing to New Zealanders - especially to those on floating rates.
The pressure on Alan Bollard has come from all sides. Prime Minister John Key is not meant to direct the Reserve Bank but Key says a cut would be useful. That's almost an instruction from the ninth floor of the Beehive. He says he's merely stating the obvious.
Economists have also come to the consensus that interest rates must fall too.
The Treasury says the economy was weak before the earthquake struck, and domestic demand was soft despite income gains from high commodity prices. Treasury's update released yesterday shows people are still not spending. Even farmers, with higher incomes, have chosen not to spend their additional income on plant, stock and the like.
Labour demand was weak in December and people continue to save and pay off debt rather than spend.
The NZIER last week revised its growth forecast down from 2.3% to just 0.3% for the next 12 months. That's effectively recession-like conditions for the next year.
Economists now say interest rates will stay low until the end of 2011, at least until the economy picks up and the growth looks sustainable.
The Christchurch rebuild will see activity pick up - but that money won't flow until next year. Interest rates are unlikely to rise now until 2012 when the economy starts to bounce back. Treasury says in 2012 the recovery will bring a 'sizeable boost to residential, commercial and infrastructure investment'.
But until then - we're living in a pancake economy - it's flat and not rising fast. Just look at the value of building consents for January 2011, totalling - $537m. That is the lowest level in 9 years, the lowest since 2002. No wonder Bill English is talking about a double dip recession.
So the markets appear to have already factored in a cut to the interest rates.
I think you will see some banks move on floating rates and floating deposit rates in the coming days. My understanding is floating rates at some banks will be go as low as 5.99%.
It's a no brainer really for Alan Bollard.
The earthquake will shave 1.5% of GDP this year. The tax take will be down by up to $5b over the next five years. Perhaps more.
The economy was stagnant before the earthquake, it's worse now. Confidence is low. Very low.
So Bollard must move and he will. The only debating point seems to be by how much - will it be a quarter of a percentage point or half. Now that's anyone's guess.