Waiting for the Reserve Bank of New Zealand Interest Rate Announcement

March 9, 2011

Damages from the South Island earthquake on February 23rd may exceed 7.5% of of New Zealand GDP and perhaps even reach 10% of it.  A majority but by no means all analysts expect the Reserve Bank of New Zealand at 20:00 GMT today to announce a cut in its 3.0% Official Cash Rate as a preventative step in case New Zealand experiences negative economic growth in the first or second quarters.  Markets are priced for a 25-basis point, retracing a 25-bp hike last July.  The central bank also raised the Cash Rate by 25 bps last June.  From end-April 2009 until that first increase, the benchmark had been 2.5%, 575 bps lower than the cyclical high of 8.25% maintained from July 2007 until July 2008.

New Zealand’s economy was not experiencing solid growth even before the earthquake, partly because of an earlier quake in the same populated region that struck last September 4.  GDP fell 0.4% in the third quarter of 2010  after an uptick of only 0.3% in the previous second quarter.  Positive overall economic expansion resumed in 4Q10.  But retail sales continued to flounder, and unemployment rose unexpectedly to 6.8% from 6.4% in 3Q.  Business sentiment picked up in January, and building permits jumped 9.6% that month.  However, these and other activities no doubt got whacked badly after the quake. 

Reasonable doubt exists that the central bank will ease as expected.

  • Bolstered by higher food and energy costs, inflation accelerated to 4.0% last quarter from 1.5% in the third quarter.
  • Producer output prices also firmed to 4.3% last quarter. 
  • Imported inflation has been fanned by the kiwi’s depreciation to a near two-decade low against the Australian dollar and by 7.3% against the dollar since cresting in early November.
  • With the ECB having signed and sealed but not yet delivered its first rate hike and many emerging market central banks continuing to tighten rates, a New Zealand central bank rate cut at this stage could exacerbate downward pressure on the kiwi and upward pressure on inflation.
  • Most times, central banks do not change monetary policy in reaction to natural disasters.  Officials may look past the initial blow to activity in the stricken area and decline to make credit more stimulative just when reconstruction spending is giving New Zealand’s economy a lift.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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