New Zealand Central Bank Cuts Cash Rate to 7.5% from 8.0%

September 11, 2008

A greater-than-forecast 50-basis point rate cut left the central bank rate at is lowest level since April 2007 and was made in response to a further deterioration of the global economy, a “marked” consumption-led domestic slowdown, continuing tight credit conditions, a forecast of sub-trend growth for a prolonged additional period of time, and a desire to front-load monetary stimulus.  Officials made the point that this front-loading does not imply that rates will bottom any lower than if they moved only in increments of 25 basis points. More interest rate relief will be coming, the timing of which will be shaped by “signs of declining inflation pressures and kiwi depreciation.”  The mentioning of the exchange rate suggests that policy will be guided by shifts in the monetary conditions index.  Stimulus will comprise both lower interest rates and a weaker kiwi.  The more depreciation that occurs in the kiwil, the less drop in interest rates will be needed.  CPI inflation is projected to peak around 5% in 3Q08, average 4.7% in 2H08, then 4.1% in 1H09, 3.2% in 2H09 and 2.7% in 1H10.  The cash rate had been lowered by 75 basis points to 5.0% in 2003, then increased by 150 basis points in 2004, 75 basis points in 2005, and 100 basis points between March and July of 2007.  All of those moves were by 25 basis points.  The last moves of 50 basis points were cuts in September 2001 and November 2001.  Today’s reduction follows a 25-bp cut on July 24th. Another reduction at the next meeting on October 23rd is highly likely, and the front-loading goal suggests that such will be another 50-basis point move to 7.0%  Only a disproportionate drop in the kiwi is likely to lead to a smaller 25-bp cut in October.

The kiwi is presently trading 0.6% below its New York closing level on Wednesday and 12.1% lower than its level on July 24th when the first rate cut of this cycle was announced.  The Australian dollar has lost 16.7% against its U.S. counterpart since July 24th but has firmed 0.2% since Wednesday’s N.Y. close.



Comments are closed.