New Zealand Cash Rate Slashed by Another 150 Basis Points

January 28, 2009

In less than ten weeks, the cash rate of the Reserve Bank of New Zealand has dropped from 7.5% to 3.5% with drops of 100 basis points on November 23rd and of 150 basis points each on December 4th and today.  One needs to look no further than that to grasp how worried monetary officials are in New Zealand and at other central banks that also have been slashing interest rates in increments rarely seen before. New Zealand’s total 475-basis point rate drop from peak is greater than Britain’s 425 bps, Australia’s 300 bps, Canada’s 350 bps, and Euroland’s 225 bps; however, such still fall 37.5 basis points short of the Fed’s peak-to-current rate reduction.  At one time, New Zealand had the higher central bank rate in the OECD, and its 3.5% rate now is still higher than most.  There will be more reductions, but today’s released text justifying another outsized easing concludes with a prediction that subsequent declines will be done in smaller increments.

The statement observes a markedly worse global and New Zealand economic outlook than when it cut rates in early December.  New Zealand has been in  recession longer than many other economies, with growth declines in every quarter of 2008.  The terms of trade has worsened.  So too have export demand prospects.  Credit conditions are tighter despite the cuts, and the statement admonishes banks to pass on today’s relief to its corporate and household customers.  Even with such cooperation, the note is made that huge uncertainty surrounds the timing and strength of an eventual economic upturn.  There are many stimulants now in place from fiscal packages, kiwi depreciation, and the extensive and highly compressed decline in interest rates. Officials are not worried about inflation or deflation, predicting that inflation will trend within its 1% to 3% target range in the medium term.  RBNZ Governor Bollard will speak further Friday on the situation.  The next scheduled monetary policy statement and official cash rate announcement will be on March 12th.

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



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