RBNZ cut OCR 100bp as expected. More rate cuts to come.
• RBNZ cut OCR 100bp as expected
• OCR to be lowered further - to 4.75% by 3Q09 on our forecasts
• Fall in "stubbornly high" domestic price pressures RBNZ's key focus
The RBNZ cut the official cash rate 100bp today (JPMorgan and consensus -100bp) to 6.5%. According to RBNZ Governor Alan
Bollard, "ongoing financial market turmoil and a deteriorating outlook for global growth had played a large role in
shaping" the decision.
Medium term inflation is still the key point of focus for the RBNZ; officials expect to lower the OCR further if
inflation evolves as projected. The Bank forecasts inflation to fall below the top end of its 1-3% target range by
mid-2009. Dr. Bollard appears particularly concerned about non-tradables inflation, saying that "evidence of actual
reductions in domestic cost pressures" will determine the timing and size of future adjustments to the OCR. Data on
Monday showed that non-tradable inflation—generated domestically and not influenced by exchange rate
fluctuations—surged to 4.1%oya, up sharply from 3.4% in 2Q, and well above the RBNZ's comfort zone. We had expected
that non-tradable inflation would ease in the third quarter, in line with the significant slowdown in the domestic
economy.
In our view, the onset of financial market instability and accumulating downside risks to global economic growth point
to even more significant policy easing from the RBNZ. Two quarters of declining GDP in 1H08 mean the New Zealand economy
already has endured a technical recession. We forecast another three quarters of falling GDP. Private consumption, in
particular, which accounts for nearly two-thirds of the economy, is facing considerable headwinds. Consumers remain
under significant pressure from still-high interest rates, a softening labour market, and the rapidly deteriorating
housing market. Furthermore, credit availability has declined. That said, the RBNZ believes that the "reduction in
domestic spending will be partly offset by the depreciation of the New Zealand dollar", along with "falling oil prices
and the recent loosening of fiscal policy."
The problematic global economic and financial market outlook, sagging domestic house prices, the falling terms of trade,
and the improving prospect that inflation will return to the RBNZ's target range over time provides ample scope for the
RBNZ to ease monetary policy assertively. We maintain our forecast that the next move in the OCR will be a 50bp cut in
December. There is no scheduled policy meeting in November. Importantly, in the press conference following today's OCR
announcement, Dr. Bollard announced that future rate cuts would not necessarily be of this size (referring to today's
100bp move). Our forecast calls for an OCR of 4.75% by end-2009.