May 22, 2008

Budget To Delay Interest Rate Cuts?

The linked article suggests the answer is yes. It will be political suicide if it does. Yes, the budget is inflationary. But the RB was forecasting cuts of about this dimesion in the short term. We see no reason why Bollard will not cut in July (or September at the latest). But we do believe that the scope for cutting may be delayed beyond then.

We believe that the Government is banking on an interest rate cut in September followed by the first pay packet in October (the first at the new tax rate) to see them through. By 18 October people will be feeling a whole lot better. By 1 November they might be realising that things are not as good as they might have seemed. For a start, even floating rate mortgages may not have moved.

This is going to be very interesting to watch.