RBNZ Cut Cash Rate By 150 bp To 5%, Fulfilled Expectations And We Anticipate More To Come

RBNZ lowered the OCR by 150bp to 5% today, inline with market expectation. The move pushes the interest rate to the lowest since early 2004 and brings the cumulative reduction since July to 3.25%.

In the accompanying statement, the central bank stated that the rate cut was made due to 'ongoing financial market turmoil and the marked deterioration in the outlook for global growth' and the decision takes monetary policy to an 'expansionary position'. RBNZ explicitly asked financial institutions to pass on lower wholesale interest rates to their customers. Going forward, the bank will assess 'against emerging developments in the global and domestic economies and the response to policy changes already in place so as to determine further rate cuts. Although possibility of further easing is not ruled out, it seems that the bank may not reduce interest rates in an aggressive manner as recently.

In terms of economic outlook, some points were emphasized:

1. The monetary policy, depreciation in NZD, as well as fiscal policy easing will provide substantial support to demand going forward and they will create rebound in economic growth as global market situations improve. GDP growth forecasts are 0.1% and 1.3% by Mar 2009 and Mar 2010
2. RBNZ has more confidence that annual inflation will return comfortably inside target range in 1H09. The bank expects inflation will drop to 3.1% by Mar 09 (previous forecast was 4.5%) and then 2.1% by 2H09
3. However, there are concerns that 'domestically generated inflation (particularly local body rates and electricity prices) is remaining stubbornly high' which pose downside risk to the balance between growth and inflation

We believe the bank's forecasts, though revised down, are still too optimistic. Global economic condition has deteriorated very quickly that many countries such as the United States and Europe have entered recession. Declines in commodities prices are likely continue in first half of 2009. Our expectation on New Zealand's economic growth is way lower than RBNZ and we do not rule out the possibility that the nation will join its counterparts in recession. Therefore, after thorough assessments of both domestic and global environment, it's highly possible that RBNZ will reduce the OCR further, bringing it to 4% in early 2009.