|Investment Research Group|
That big hairy prediction has just been made by giant US investment bank Morgan Stanley in a recent report. The forecast cuts, which are well above what most local economists are predicting, reflects just how quickly the economy is slowing down.
New Zealand is one of the few countries that is considering rate cuts in the near future, MS says. Another is Australia. One reason for this is that other countries have kept their rates low or have begun cutting earlier.
Since countries downunder import a lot of their inflation - and have been booming because the commodities cycle has been in our favour - our rates have been relatively high. The good news is that gives us plenty of room to cut rates and help stimulate the economy when times are not so good. Other countries like Japan (0.5% official rate) and the USA (2.0%) have much less leeway.
There are two main reasons why MS expects most central banks to be reluctant to cut rates even in the face of slowing growth or near-recession.
In 20 out of 36 countries it researches, short-term interest rates are negative (are lower than inflation). This is almost the same as giving money away and is designed to encourage people to borrow and spend. Second, despite a global economic slowdown, inflation is likely to turn out stubbornly high in many countries.
"With demand AND supply decelerating, this slowdown will produce less spare capacity and thus less disinflationary pressures than usual, limiting the room for many central banks to ease policy," it says.
Looking at the rest of the world, MS expects the US may reduce interest rates in the middle of 2009 as things worsen over there. "We think the worst for the real economy is still to come…" it says.
In Japan, the rates may be cut 25bp next year (to just 0.25%!), will rise in the euro zone and stay unchanged in the UK. So with a couple of weeks advance warning from the smart people at Morgan Stanley (assuming they are right - only Dr Bollard knows for sure what he is going to do), how can investors take advantage?
The first step would be to lock in some rates at current highish levels. Prudent investors will be holding cash during these volatile times and anything that is on call probably should be placed into a three month or six month term deposit.
Those who fancy a bit of trading could pick up some longer dated government stock or corporate bonds then resell them after the rate drops. This should deliver a capital gain as prices adjust to reflect the new reality of lower yields.
If rates are coming down, is it time to get back into property? Probably not. Once people lose confidence in a market and lenders become more reluctant (if not incapable during the present credit crunch) to offer finance, it becomes very hard to reinflate a bubble.
One exception is to buy property with a good tenant whose rent covers the mortgage. Such places have been hard to find for some years but may be available now. Such a position will be easier to protect during likely hard times still to come in the property sector.