Data Flash (New Zealand)
NZ Quarterly Economic Forecasts - July 2002
Slower growth and strong NZ dollar will cap interest rates
In May the Reserve Bank of New Zealand argued that the Official Cash Rate (OCR) would have to rise to 6.75% to ensure a
return of CPI inflation to below 2%.
Only two months later we attach a 35% probability to a scenario where the OCR will not even reach 6.0% during this
cycle.
There are four key reasons for this change:
Partly as a result of the RBNZ's comparatively aggressive interest rate policy, the NZ dollar has appreciated
significantly faster than expected, which will put additional downward pressure on inflation over the coming year.
The combination of lower price competitiveness of the export and import competing sectors, falling farm incomes, slowing
population growth, and the withdrawal of interest rate stimulus suggests that New Zealand's growth rate will halve over
the next 12-18 months.
Uncertainty about the global recovery has increased again, due to risks for the US economy arising from the continued
correction of the US stock market. The Minister of Finance has signalled that, later this year, he will re-write the
Policy Targets Agreement with the yet to be appointed new Reserve Bank Governor. That will force the RBNZ to adopt a
less aggressive policy approach. Notwithstanding these considerations, our central scenario includes the expectation of
one final �% rate hike by the RBNZ on 14 August, which would lift the OCR to the perceived `neutral' level of 6.0%.
A moderate RBNZ statement accompanying the move is expected to generate some downward adjustment in domestic yields,
considering that markets are still pricing a cash rate of 6.50% for late 2003.
Ulf Schoefisch