50-Bp New Zealand Rate Cut to 3.0% Matches Modal Market Forecast

March 11, 2009

The Reserve Bank of New Zealand Cash rate was cut for the sixth time, dropping to 3.0% from 3.5% and a peak of 8.25% prior to last July 24th.  “Inflation pressure is abating rapidly” in response to global and domestic recessions.  All segments of New Zealand’s economy are very weak at the moment.  However, forward-looking observations in a statement released by the bank are upbeat and intended to temper speculation about the possible size and frequency of future moves.  They will be “much smaller” in size and not lead to a zero-interest rate policy or quantitative easing.  Plenty of stimulus is in the pipeline: lower interest rates, fiscal support, and a 38% depreciation of the kiwi from USD 0.8213 on March 14, 2008 to US$ 0.5069 at present.  This support as well as future lending rate declines that are in the pipeline are being counted on to end the downtrend of GDP by midyear and to spur a gradual recovery thereafter.

Officials seem overly optimistic about global economic prospects.  The idea that Europe, Japan, and the United States would start recovering by summer has faded.  It’s even possible that global economic conditions will be significantly worse then than now.  If that happens, New Zealand rates will drop below levels that officials presently contemplate.

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



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