New Zealand’s recession worries prompt big rate cut

The Reserve Bank of New Zealand lowered the official cash rate to 4.75 per cent.

New Zealand’s central bank cut interest rates by an outsized half a percentage point, moving to support an economy that has slipped in and out of recession while keeping up with counterparts such as the Federal Reserve that are also loosening policy aggressively.

The Reserve Bank of New Zealand’s decision to lower the official cash rate to 4.75 per cent on Wednesday shows how inflation is quickly falling behind economic growth as a top concern of policymakers. Unlike many countries that navigated the aftermath of the Covid-19 pandemic without slipping into recession, New Zealand has experienced crippling contractions in activity for close to two years.

Headwinds to growth have included lacklustre demand from China, which is one of New Zealand’s top trading partners. Consumers have remained skittish after inflation ran hot and housing costs increased, although these pressures have eased recently, paving the way for the RBNZ to cut rates.

“Members agreed that increasing excess capacity is leading to lower inflationary pressure in the New Zealand economy,” the RBNZ said. “Economic growth is weak, in part because of low productivity growth, but mostly due to weak consumer spending and business investment.”

The hefty cut in the official cash rate comes as central banks in the US, Canada and Europe have stepped up moves to revive growth after years of battling the worst outbreak of inflation since the 1980s.

Reserve Bank of New Zealand governor Adrian Orr. Picture: Bloomberg

The RBNZ also listed a number of geopolitical risks for the economy that included the conflict in the Middle East, and the slowdown in China.

It also cited the coming US Presidential elections pointing at potential risks around government spending and global trade.

“Uncertainty about the effectiveness of recent policy actions in China also posed downside risks to New Zealand’s export growth, as well as export and import prices,” the RBNZ said.

“Heightened uncertainty around the US elections, and the implications for US trade and fiscal policies, could also be significant for international financial markets and global economic activity,” it added.

The RBNZ added 525 basis points to the official cash rate to tame price pressures during the pandemic, with officials unusually explicit that a recession was a price worth paying if it slowed aggregate demand quickly.

Now, economists expect the RBNZ will follow up this month’s cut to interest rates with another outsized reduction in November as inflation appears to no longer be a major concern. Market pricing suggests cuts will extend deep into next year, with the official cash rate tumbling to 3 per cent by August.

“Economic data suggests the need to return policy settings to neutral quickly,” said Jarrod Kerr, chief economist at Kiwibank. “The current economic environment remains depressed and requires rate relief.”

The RBNZ’s cash rate could still be around 200 basis points above what economists refer to as a neutral rate even after Wednesday’s outsized reduction, Kerr said.

“So in order to remove the restrictiveness of current policy settings, the RBNZ should accelerate their cuts,” he said.

The Wall Street Journal