Awaiting a New Zealand Rate Cut

March 10, 2009

The Reserve Bank of New Zealand is expected to cut its cash rate by 50-100 basis points to 2.5-3.0%.  The announcement of this sixth rate of of the cycle will be made at 20:GMT today (09:00 locally on Wednesday).  Estimates of the size of the cut range from 50 basis points to a full percentage point (that is by 100 basis points).  Previous reductions from a peak of 8.25% amounted to 25 bps last July 25th, 50 bps on September 11th, 100 bps on November 23rd and 150 bps each on December 4th and January 29th. 

A restrictive monetary policy, drought conditions, and a bursting housing bubble caused to New Zealand to slip into recession ahead of most economies at the start of 2008. The nominal central bank rate was as much as 7.5% at mid-November.  Being commodity-intensive and highly reliant on trade, New Zealand is especially susceptible now to the headwinds of a severe global recession.  All components of demand are falling, and industrial output has been very weak.  The jobless rate of 4.6% is at a five-year high.  On-year GDP growth declined from 3.7% in the first quarter of last year to negative 0.1% by 4Q08.

The Reserve Bank targets consumer price inflation at 1-3%.  Inflation of 5.1% last summer was way above target but below the central bank rate.  In the fourth quarter, inflation slowed abruptly and by even more than forecast to 3.4%.  PPI inflation fell below 10% last quarter but still exceeded 9%. However, expected inflation contracted sharply from 2.8% in November, near the target ceiling, to a target-centric 2.2% according to a subsequent survey last month. Consumer borrowing is flat, and consumer sentiment is shell-shocked.

The Reserve Bank of Australia failed to cut rates last week, surprising analysts like myself.  Subsequent Australian data such as GDP were weaker than assumed and revealed the central bank’s decision to have been a bit foolish.  The Reserve Bank of New Zealand will not want to be caught similarly flat-footed.  I think it will cut rates by more than 50 basis points, which is the modal forecast.   I’m looking for a 75-bp decrease and have seen forecasts of even more. Officials last time indicated that more cuts would be made but their magnitude would diminish now that the cash rate has dropped below on-year inflation. That rules out  a move of more than 100 basis points.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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