The RBNZ delivers its latest Monetary Policy Statement on Thursday, in the midst of a collapsing world economy, plunging share markets, mounting job losses, and extreme measures to revitalise the global financial system.
In other words, just another day at the office.
So far the RBNZ has taken a very assertive approach through this easing cycle – identifying the likely low point for interest rates and delivering most of the expected easing in one hit. This hasn’t always been clear at face value, because that end-point has been repeatedly revised lower as the outlook for the global economy has deteriorated. In the December MPS, the RBNZ’s interest rate projections bottomed out at around 5%; by January, we estimate that they had a figure in mind closer to 3%, and we think this time it will be more like 2%.
The most significant development for the RBNZ since January will have been a further downward revision to Consensus Forecasts for global growth.
New Zealand’s major trading partners are now expected to contract by 0.9% in this calendar year, followed by growth of just 2.2% next year. The largest downgrades were for Australia and Asia, which until recently were seen as bastions of resistance against the global downturn. We estimate that these latest downgrades would lower the RBNZ’s interest rate projections by another 50bp, relative to what they had in mind in January.
The other major factor was a fall in surveyed inflation expectations for two years ahead, from 2.7% in November to 2.3% in February. The RBNZ’s forecasting model assumes a strong degree of stickiness in inflation expectations, so the pace of the decline will have been a ‘surprise’ at least in a mechanical sense – and would shave another 40bp off their interest rate track.
