We don’t think that the market has grasped the full message of the Reserve Bank’s latest Monetary Policy Statement.
The RBNZ cut the cash rate by 50 basis points to 3.00%, a smaller move than we or the market were expecting, and indicated that any future cuts are likely to be smaller than those seen in recent times. The 525bp of rate cuts since July last year, the steep fall in the currency, and a strong fiscal impulse mean that a lot of stimulus has been applied to the economy in a short space of time, and is expected to drive a strong recovery over coming years. Indeed, their forecasts for New Zealand are positively cheery in the face of a global recession, with GDP growth returning to 4.5% in calendar 2010 and 4.1% in 2011.
The RBNZ’s 90-day rate projection suggested that a further cut in the OCR to 2.5% is likely, though Governor Bollard admitted that there is a high degree of uncertainty around their forecasts for a rapid recovery in growth, and an OCR of 2% is still a possibility.
However, the RBNZ seem concerned about the consequences of taking the cash rate to very low levels. The press release noted that “New Zealand needs to retain competitiveness in the international capital markets,” implying that rates among New Zealand’s peers (specifically Australia) may be a constraint on policy settings here. It’s debatable whether a lower cash rate would truly present a barrier to raising funds offshore – longer-term rates of return are determined by the market, and if international investors demand a premium for lending to New Zealand, then they will charge one. The risk is that further OCR cuts may fail to get traction on longer-term rates – the problem that has plagued the US and the UK throughout this easing cycle.
