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RBNZ easing will prevent prolonged recession

Research note: RBNZ easing will prevent prolonged recession

• Shallow economic recession forecast in 2008

• RBNZ to cut cash rate another 75bp this year

• Inflation to peak at 5.2%oya in 4Q

RBNZ Governor Alan Bollard signaled in June that softer economic growth and the prospect of easing medium-term inflation were paving the way for the official cash rate (OCR) to fall. In July, amid signs of further deterioration in the New Zealand economy, the RBNZ embarked on what we believe will be an extended easing cycle. It cut the OCR 25bp to 8.0%, the first rate cut in five years.

The RBNZ appears prepared to lower its policy rate significantly, although at a steady pace so as to not destabilize the economy or financial markets. It has acknowledged that there is ample scope for a projected easing in interest rates, given that real interest rates in New Zealand are among the highest in the developed world. We expect another three 25bp cuts this year—in September, October, and December (there is no scheduled policy meeting in November) and further rate cuts in 2009. We forecast the OCR at 6.25% by mid-2009, but how quickly the RBNZ lowers the cash rate will depend on how the economy responds to policy changes. The desire to avoid an inflationary plunge in NZD minimizes the chance of a 50bp cut.


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