New Zealand is facing more rate cuts as the economy takes longer than expected to emerge from recession.
The country’s central bank yesterday slashed interest rates by 1.50% to a record low of 3.5% to meet the pressures from a recession that’s lingering longer than expected as the global outlook darkens, as we saw with the dramatic set of forecasts from the International Monetary Fund.
RBNZ Governor, Dr Alan Bollard made it clear that any further cuts would be smaller after yesterday’s record chop, the largest of the five reviews since last July, when the rate was a record 8.25%.
The cash rate is now at its lowest level since it was established in March 1999, a real sign of the economy’s slide and failure to bounce from the slump, despite the bank thinking late last year that it would be emerging from the slowdown about now.
Instead the economy looks like being in recession for at least another six months, which would make it six successive quarters of negative growth, a situation not experienced for at least 50 years.
The RBNZ move came hours after the US Federal Reserve held its main interest rate in a range from zero to 0.25% (but indicated the US economy has worsened since mid-December).
That in turn came after the IMF’s downgrading of 2009 growth to effectively zero (0.50% was its guesstimate) and perhaps a small rise next year.
The 0.50% estimate was down from the 2.2% forecast in the last update in November.
These forecasts provided an effective backdrop to the Kiwi move and commentary from the bank yesterday that the global slump was hitting New Zealand harder than previously thought.
"We’re probably still in recession and we will likely be there for the first half of this year,” Bollard told reporters after the decision and the release of its statement explaining the cut.
"The Reserve Bank today reduced the Official Cash Rate (OCR) from 5.0 percent to 3.5 percent," the statement said.
"Reserve Bank Governor Alan Bollard commented that “the news coming from our trading partners is very negative.
"The global economy is now in recession and the outlook for international growth has been marked down considerably since our December Monetary Policy Statement.
“Globally, there has been considerable policy stimulus put in place and we expect this to help bring about a recovery in growth over time. However, there remains huge uncertainty about the timing and strength of a recovery.
“The extent of the decline in global growth prospects and the ongoing uncertainty has played a large part in today’s decision.
"We now expect the impact on New Zealand of these developments to be greater than we did in December, as a result of a more negative outlook for the terms of trade and exports, and tighter credit conditions.
“Inflation pressures are abating. We have confidence that annual inflation will be comfortably inside the target band of 1 to 3 percent over the medium term.
“Given this backdrop it is appropriate to take the OCR to a more stimulatory position and to deliver this reduction quickly.
“Today’s decision brings the cumulative reduction in the OCR since July 2008 to 4.75 percentage points.
"Lower interest rates will have a positive impact on growth, alongside a lower exchange rate and fiscal stimulus, provided firms and households do not unnecessarily contract their spending.
“To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers. This will help New Zealand respond flexibly.
“Further movements in the OCR will be assessed against emerging developments in the global and domestic economies and the response to policy changes already in place. We would expect any further reductions to be smaller than those seen recently.”
Economists reworked their forecasts for the year with the cash rate now seen as hitting a low of 2.5% by the middle of the year.
The RBNZ cut interest rates by a record 150 basis points to 5% in December, as it looked to bring forward cheaper borrowing for businesses and consumers to lessen the impact of the global slowdown on the local economy.
The economy contracted in the first three quarters of 2008, which is expected to continue into the middle of 2009 at least.
RBNZ Governor Bollard said in December that the recession had probably ended in the fourth quarter and would give way to shallow growth. It didn’t, and there’s at least another six months of no growth.
The annual inflation rate slowed by its greatest amount in a decade in the fourth quarter to 3.4% from the previous quarter’s 18 year high of 5.1%. The bank is required to keep headline inflation between 1-3% over the medium term.
The RBNZ’s comments on the boost from trading partners echoed the slump in dairy prices reported by Fonterra, the country’s and the world’s biggest exporter of dairy products.
Fonterra said in a statement this week that it had revised the forecast payout for the 2008/09 season to $NZ 5.10 per kilogram of milksolids.
That was a 90 NZc reduction in the previous forecast of $NZ6.00 per kgMS issued in November 2008.
Fonterra Chairman, Henry van der Heyden said the lower forecast reflected the continuing decline in international commodity prices coupled with the ongoing effects of the global financial crisis, including significant fluctuations in the Kiwi currency.
“It’s clear now that the financial crisis is hitting the global economy hard, and dairy has been impacted along with
