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JP Morgan - Financial Forecast

JP Morgan - Financial Forecast

Previously, we had forecast that the RBNZ would cut the official cash rate (OCR) at least 100bp on Thursday. Now, though, following the RBA's decision today to cut Australia's cash rate a larger than expected 100bp (JPMorgan and consensus -75bp) and the latest dismal news on global manufacturing, including another fall in the US ISM last night and a record low on China's and the UK's PMIs yesterday, we think the RBNZ will cut the OCR 150bp this week, taking the key rate to 5%.

Indeed, the RBNZ appears to have more work to do than its neighbouring counterpart, given recent economic data signalling an even deeper recession in the New Zealand economy (including last week's dire business sentiment survey discussed below). Furthermore, the rising prospect that inflation will return to the RBNZ’s target range more quickly than previously forecast points to the need for more assertive policy easing. As indicated by data last week, pipeline pressures and inflation expectations have started to ease and, in our forecasts, inflation will fall below the RBNZ’s target range of 1-3%oya by 4Q09.

The Kiwi economy already has contracted for two straight quarters and, on our forecasts, GDP should decline for at least another three. Falling house prices and rising job losses make the outlook for already weak household spending particularly bleak. Lower interest rates and personal income tax cuts may provide something of a floor, but these will be undermined to a large extent by low confidence, mainly because of increased anxiety about job security; this view was confirmed last week by the details in the NBNZ business confidence survey.

The business confidence measure worsened to -43.0 in November from -42.3, suggesting a net 43% of respondents expect business conditions to worsen in the coming year. Furthermore, firms look set to shed additional human capital, with 86% of respondents expecting the unemployment rate to rise in the coming year (up from 79% previously). Indeed, the more important reading of firms’ own activity expectations slumped from -11.4 to -14.1, the lowest reading .JP Morgani

We maintain our forecast of a terminal RBNZ cash rate of 3.25%, half the prevailing rate of 6.5%. One factor arguing against an even lower terminal cash rate is the forthcoming fiscal stimulus. Finance Minister Bill English recently estimated that the government’s fiscal stimulus package would inject about NZ$7 billion into the economy over the next two years, or about 4% of GDP. Details of the package are expected in mid-December after Parliament resumes.    


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