FYI | Sep 12 2008
By Chris Shaw
For some time the New Zealand economy has been under pressure, and the Reserve Bank of New Zealand (RBNZ) has moved to address this, cutting official interest rates yesterday by 0.5% when the market had been factoring in a cut of only 0.25%.
As TD Securities senior strategist Joshua Williamson notes, the move is an acknowledgement by the RBNZ of the economy’s weaker growth profile in the short-term, which reflects both the weaker global economy and the fixed lending rate structure prevalent in New Zealand.
Williamson suggests more cuts are on the cards, as the move yesterday is probably enough to deal with the liquidity squeeze consumers and businesses have been facing, but further work will need to be done to deal with the recession in which the economy finds itself.
Credit Suisse agrees and points out the larger than expected cut is simply a bringing forward of the timing of such action, as the overall level of cuts is unlikely to change. While the broker expects a further 1.0% in rate cuts in coming months as the RBNZ deals with economic weakness, it suggests rate relief for consumers in general will take some time to flow through given the high proportion of fixed-rate loans and the otherwise long lag between official rate cuts and lower rates for households.
JP Morgan took a similar view to the move, suggesting while it should prove to be a positive for households it would take time to flow through into benefits for retailers given the fixed rate environment. As well, the broker notes house prices continue to fall, while food and fuel costs are rising, meaning households will remain under pressure and not look to increase discretionary expenditure levels.
Deutsche Bank sees one plus from the move, suggesting it could mean a bottom in the housing market by the end of the year and a recovery into 2009. While this would be a positive for household wealth and eventually consumption levels, Credit Suisse sees continued nervousness given the larger than expected cut now has created greater uncertainty as to the size and timing of any future cuts.
