The RBNZ delivered the 50 basis point rate cut that we expected last week, and gave a surprisingly clear signal about the path for interest rates in the foreseeable future.
The main motivation for a large cut was the deterioration in the outlook for the global economy since the March Monetary Policy Statement. Despite talk of ‘green shoots’ in some regions (which mostly consist of activity falling at a slower pace), hopes for a nearterm recovery are rapidly fading. The latest Consensus growth forecasts for New Zealand’s major trading partners were revised down to -2.2% for this year and +2.0% for next year; plugging in the recent forecasts by the IMF, whose relative gloominess on the Asia-Pacific region seems to be more in line with the RBNZ’s thinking, gives a 2.8% fall this year and a miserly 0.8% rebound next year.
The RBNZ also stated that financial conditions were tighter than was warranted, repeating the warning they gave in an unscheduled statement in early April. Long-term interest rates rose sharply in March, as borrowers read the MPS as a signal that rates had bottomed, and rushed to lock in longterm fixed rates. RBNZ data released on Thursday showed that as much as $9bn of mortgages were switched into fixed terms of longer than a year in March – that’s about 7% of all home loans outstanding. No wonder the wholesale funding market clogged up at the time.
We had noted before that the RBNZ’s signal on the outlook for rates would be at least as important as the OCR decision itself. Last week’s statement provided an interesting twist: “we expect to keep the OCR at or below the current level through until the latter part of 2010”. It’s unusual for a central bank to commit to keeping interest rates unchanged for a specific period, but in this case they’re not alone. The central banks of Canada and Sweden have gone down this avenue in recent weeks, having already reduced their policy rates to near-zero, and one ECB official has discussed taking this approach.
