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September rate cut beckons for Kiwi recession

Research note: September rate cut beckons for Kiwi economy in recession

• Economic momentum in New Zealand has slowed to a standstill and, according to our forecasts, the economy probably is in the midst of a technical recession, with GDP having contracted in 1Q. Weaker economic activity, however, has emerged alongside high and rising inflation. The growing headwinds faced by New Zealand consumers have fanned fresh calls for a rate cut as soon as next week.

• Market pricing suggests a 50% chance of a 25bp cut next Thursday. While a rate cut next week remains a significant risk, we believe that the RBNZ will delay a rate cut until September. Leaving the OCR unchanged next week will allow time to assess whether the weakness in employment reported in 1Q has been sustained and, as a consequence, whether the risk of additional wage pressures will abate, and also to gauge the impact on NZD.

• The RBNZ has left the official cash rate (OCR) at a record high 8.25% since July 2007, although central bank Governor Alan Bollard signalled in June that softer economic growth and the prospect of easing medium-term inflation should pave way for the OCR to be lowered later this year.

See... Rate_cuts_beckon_for_Kiwi_economy_in_recession.pdf

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