The Reserve Bank cut the OCR by a further 150 basis points to 3.50% last week, in line with our expectations.
The majority of analysts were picking a 100bp move, with market pricing splitting the difference.
The RBNZ has received at least as much unwelcome news on the economy since the December Monetary Policy Statement as it did between the October and December reviews. Consensus Forecasts for global growth have been slashed at an unprecedented pace. New Zealand’s main trading partners are expected to contract by 0.1% this year, compared to forecasts of 1.3% growth at the time of the December MPS, and we expect this will be downgraded even further as forecasters come to grips with the idea that Australia won’t avoid recession this year. RBNZ Governor Bollard was accurate in describing this as “worse than anything we have seen since World War II”.
Closer to home, the near-term outlook for activity is substantially worse. In December, the RBNZ shared our view at the time that negative GDP growth would be limited to the first three quarters of 2008 (though growth would remain sub-par for a while longer than that). But recent business surveys have been extremely weak – firms are shoring up their own prospects by delaying investments and shedding staff.
Meanwhile, it’s becoming clear that much of the extra cash hitting consumers’ pockets from cheaper fuel, lower interest rates and tax cuts is staying there. We now expect Q4 GDP to mark the deepest point of the recession with a 0.9% decline, followed by further declines in the first half of 2009.
And if the RBNZ needed any more reason to deliver a large cut, last week also saw another significant drop in Fonterra’s dairy payout forecast to $5.10/kg for this season. Global recession has hit demand for dairy products, at the same time that previously high dairy prices have spurred new supply. Even allowing for a recovery in production from last year’s drought, this still means around $3bn less in dairy farmers’ pockets compared to last season. The threat to prices from market interventions in Europe, with the US possibly to follow, adds further downside risk to the dairy price outlook.
