New Zealand Interest Rate Preview
March 9, 2010
The second interest rate policy meeting of 2010 is being held this week, and an announcement to retain the officials cash rate at 2.5% is expected around 20:00 GMT on Wednesday. The key rate has been 2.5% since late April 2009, when the rate was cut by 50 basis points. Initially, officials indicated that such might not be the final reduction, but after subsequent meetings last June, July and September, they dropped that warning and merely said that a rate increase was unlikely before very late 2010. The likely timing of an initial hike was modified to some time during the second half of 2010 after policymakers met last October and changed it again to around the middle of this year when they met in December.
A rate of 2.5% is 575 basis points below the prior cyclical peak of 8.25% which prevailed up to mid-2008. There were seven ensuing rate reductions: 25 bps in July 2008, 50 bps in September, 100 bps in October, 150 bps in December and again in January, and finally 50 bps each in March and last April. New Zealand experienced a prolonged recession, triggered initially by monetary restraint, higher commodity prices and a drought but extended by the global financial crisis and blow export demand. Real GDP contracted for five consecutive quarters, beginning in the first quarter of 2008, and growth in both the second and third quarters of last year was marginally positive only at 0.2% in each period. The statement after policymakers met in late January 2010 observed improving exports and household spending, but said business investment is still weak, credit demand is subdued, and consumer confidence is cautious. Inflation, which is no longer elevated and at 2.0% at end-2009, was projected to track within target boundaries this year because of persistent resource slack.
None of the recent data releases is likely to prompt any change in plans to hold off a rate hike until around the middle of this year. New Zealand is not doing as well as Australia, where four rate increases have been made already and a fifth in April looks plausible. New Zealand wage inflation in 4Q09 of 1.5% on year was the lowest since 2000 and below expectations. Fourth-quarter producer prices also were lower than assumed. Retail sales were flat in December on month, not up 0.6% as hoped, and non-auto sales slumped 1.8%. Whereas business sentiment improved significantly in February, consumer confidence sank 5.9% that month. Perhaps most worrisome, imports dived 12% in January to nearly a five-year low. The kiwi is 1.0% stronger against the U.S. dollar than when officials last met.
The next policy meetings are scheduled for April 29, June 10, July 29, and September 16.
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
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