Hopes that the RBNZ was nearing the end of its easing cycle in December have since been overtaken by events. We expect another massive 150bp cut to the OCR on Thursday, on the way to a low of 2.50% in coming months.
Our latest Economic Overview published last week, surveys the economic landscape in detail, with the conclusion that the global economy is facing the steepest downturn in decades, and that New Zealand faces a continued rough patch this year even with the help of extra stimulus from fiscal policy, interest rates and a weaker currency. Weak activity and waning inflation pressures have given the RBNZ substantially more room to lower interest rates.
In December, the RBNZ shared our view at the time that the contraction in the New Zealand economy would be limited to the first three quarters of 2008 (though growth would remain sub-par for a while longer than that). More recent information, in particular the latest Quarterly Survey of Business Opinion, has put paid to that hope. Firms are clearly battening down the hatches and see little hope of an improvement in their fortunes in the near future. Consumers are remaining cautious even with more cash in hand from lower fuel prices, personal tax cuts and lower mortgage rates. We now expect several more quarters of negative GDP growth, with the steepest drop coming in Q4 2008.
The other key developments since December are a further significant downgrade to Consensus Forecasts for growth in New Zealand’s major trading partners; a sharp fall in capacity utilisation, indicating that there is now a substantial amount of slack opening up in the economy; and a deteriorating outlook for prices of New Zealand’s major commodity exports. The ongoing tension in global credit markets is virtually unquantifiable in terms of what it means for monetary policy, but it will certainly be playing on the RBNZ’s mind.
