Markets will be intensely focused on what the RBNZ has to say at Thursday’s OCR review, following a rate cut in March that actually kicked off a substantial tightening in financial conditions.
The outlook for the global economy has continued to deteriorate since the March Monetary Policy Statement. The latest growth forecasts by the IMF suggest that New Zealand’s major trading partners will contract by 2.8% this year and grow by just 0.8% in 2010 – this compares to the RBNZ’s March forecasts of -1.8% and +1.6% respectively. Forecasts for the Asia-Pacific region, which was previously expected to be relatively resilient, are now being revised down heavily.
This bodes poorly for any near-term recovery in the New Zealand economy, which is already starting from a weaker point than the RBNZ assumed. GDP fell by 0.9% in the December 2008 quarter, against the RBNZ’s forecast of a 0.8% decline, and we think they will revise down their forecast of a 0.8% drop in Q1 as well. The latest Quarterly Survey of Business Opinion will have reinforced the sense that Q1 was at least as difficult as Q4 – indeed, without the contributions of agriculture and government (which are not covered by the QSBO), GDP in the last two quarters could have been on a par with some of the horrific outturns seen overseas.
On top of this, financial market developments have been less than helpful. In March the RBNZ was fairly cautious about the scope for further interest rate cuts, but their forecasts did rest on an easier mix of monetary conditions – largely through a weaker exchange rate. Instead, the New Zealand dollar has risen in recent weeks, and is currently tracking around 10% above the RBNZ’s projections.
