New Zealand Cash Rate Cut to 5.0% from 6.5%

December 4, 2008

The Reserve Bank of New Zealand like other recent central banks chose a bold option, topping the size of its three prior cuts — 25 basis points in July, 50 bps in September and 100 bps in October — as well as reductions earlier this week of 100 basis points each by the central banks in Australia and Thailand.

In a released statement to explain today’s action, officials claimed that monetary policy is now “expansionary” and would lend support to New Zealand demand along with fiscal stimulus “now in train” and depreciation of the New Zealand dollar of 36% against the U.S. dollar from its peak last February. The statement revised growth prospects downward, blaming worse global growth and financial turmoil, but also expressed greater confidence that although domestic inflation has stayed “stubbornly high” that overall inflation will “return comfortably” to within its 1-3% target sometime in 1H09. Risks to growth and inflation are skewed to the downside, and the statement left the door open to more rate cuts. If all goes as assumed, another rate reduction at the January 29th meeting is very likely. A nominal 5% cash rate set against the backdrop of sub-3% inflation, a domestic recession that began during the first half of this year, and a significant global slowdown does not appear that expansionary. There is a hint in the statement that any future rate cuts will be smaller in size, and the market is priced for a January move of 50-75 basis points. The way things are going, the drop should probably be at the top, if not above, that range.



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