RBNZ Reduced OCR By 50 bps To 3%

RBNZ announced to reduce interest rate buy 50 bps to 3% in March. At the same time, the Governor Alan Bollard signaled a slowdown in monetary easing cycle as New Zealand has to 'retain competitiveness in the international capital markets'. The NZD rebounded to almost 2 weeks' high against the USD after the news as the market had expected a bigger cut.

In the post-meeting statement, the Governor showed optimism on a recovery in 2010 and expected current level of monetary and fiscal policies are sufficiently simulative to achieve its goals. Since July 2008, the RBNZ has slashed the OCR by 525 bps. The substantial change in monetary policy, together with the fiscal policy as well as depreciation in NZD, should help support the nation's economy and the central bank expects to see 'activity troughing in the middle of this year'.

Concerning further rate cuts, RBNZ does not expect a near-zero policy rate and believe 'the rapid easing of monetary policy to slow. Any future cuts will be much smaller than observed recently'.

RBNZ also revised projections for the GDP growth and inflation. GDP was revised down to a contraction of -0.8% in 2009, compared with a +1.7% growth estimated in December. For the first 2 quarters in 2009, GDP is expected to drop by 0.8% each. In 2010, growth will turn positive again to +0.2%, compared with previous forecast of +1.4%. Considering inflation, the central bank believes CPI will remain with the target band of 1-3% by the end of 2009 while unemployment rate could rise to 6.8%, 11-year high, by early 2010.

While we believe the 50 bps cut in March is not the end of the easing cycle in New Zealand, we understand the relatively small reduction was in response to Australia's, its closest counterpart, pause in rate cut last week. In the accompanying statement, the RBNZ stated the need to retain competitiveness in international capital markets. We expect the RBNZ will closely monitor RBA's rate decision in April before deciding how much another cut will be adopted.

New Zealand's current account deficit, currently staying at 8.6% of GDP for the Sep 08 quarter, is twice as large as Australia's 4.3% of GDP in 4Q08. One reason for that is New Zealand is more reliant on exports than Australia. In fact, it's seldom for policy rate in New Zealand to be lower than Australia.

Given what was explicitly expressed by Bollard, we trimmed our forecasts on RBNZ's rate cuts in April and June to 25 bps each.