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RBNZ cuts OCR by 50 bps to 4.75%


Data Flash (New Zealand)
RBNZ cuts OCR by 50 bps to 4.75%

Key points

As widely expected, the RBNZ lowered the official cash rate (OCR) by 50 bps to 4.75% when it released its quarterly Monetary Policy Statement.

The tone of the statement was relatively hawkish, setting a high hurdle for further rate cuts. The RBNZ noted that today's rate cut factored in expected further downward revisions to global growth forecasts, a sharp reduction in the price of New Zealand's export commodities, as well as a slowdown in domestic growth to 1.5% over the next year.

Only if conditions weaken beyond those assumptions would the RBNZ consider a further reduction in interest rates.

The next OCR review date is 23 January, followed by the next Monetary Policy Statement on 20 March.

At this stage, we put the probability of a further rate cut at around 30%.

In putting the RBNZ's scepticism about further rate cuts in context, Dr Brash noted that the economy had been in a relatively strong position before the current downturn and was showing signs of excess capacity usage.

The economic outlook underlying the RBNZ decision is for domestic growth to slow sharply during the current quarter and into early 2002. A recovery is expected for the second half of next year, pushing growth back to 3% in 2003.

The Bank argued that the temporary slowdown in growth will take pressure of high capacity usage and ensure the reduction of the annual rate of inflation to around 1.5% over the next 18 months. Initial market reaction

Fixed interest markets initially rallied on the news of a 50 bps cut, but then sold off as the `hawkish' tone of the statement was digested.

The NZD showed no reaction to the announcement.

Our assessment

The RBNZ clearly indicated that continued weakness in global and domestic data, including commodity prices, had been built into today's rate cut. With the move encompassing such an insurance element against further negative news, the Bank cautioned against `double-counting' negative data once they are actually published.

With relatively strong assumptions already built into the Bank's forecasts, the hurdle for another rate cut is undoubtedly high:

Trading partner growth forecasts, as measured by the international Consensus forecasts have to deteriorate substantially further. With most forecasts having been adjusted markedly since 11 September, and with data over the next few months likely to show some consolidation after the extremely bad September/October numbers, significant further revisions to Consensus forecasts have become less likely. It should also be noted that, by the time of the next RBNZ review, the first forecasts for 2003 will have been published. They are likely to show a strong rebound in growth expectations.

The Bank assumed a drop in average world prices of New Zealand's export commodities of more than 10% and a reduction in the terms of trade of 8.5% next year, thereby more than reversing the substantial terms of trade gains of the past few years. Current indicators imply limited downside risk to those assumptions.

According to the Bank, growth in 2002 will slow to around 1.5%, which is at the pessimistic end of market expectations. The Bank's forecast includes a sharp slowdown at the end of this year and into 2002, exacerbated by a downturn in investment.

Our central view remains that 4.75% is the bottom of the interest rate cycle and we put the chance of a further rate cut at around 30%

That is consistent with our view that the global and domestic economies will rebound by mid-2002, but that there is a significant chance that such an upturn will be delayed. While we do not expect another rate cut, the risk distribution surrounding our central view remains skewed to the downside.

Ulf Schoefisch, Chief Economist, New Zealand

This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

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