FYI | Jan 30 2009
By Chris Shaw
The Reserve Bank of New Zealand (RBNZ) has again shown it is prepared to make the big decisions with respect to interest rates, this week cutting the official interest rate by 1.5% to 3.5% as it attempts to sustain the domestic economy in the face of the global recession.
Standard Chartered notes further rate cuts have not been ruled out and to reflect this it has adjusted its forecasts accordingly, the economists now factoring in additional cuts of 0.75% at both the March meeting and in the June quarter, which would bring the cash rate down to 2.0%. This would be the low point in the cycle in their view.
The move by the RBNZ also opens the way for further cuts by the Reserve Bank of Australia (RBA) in the economists’ view, as along with a forecast 0.75% cut at the RBA’s meeting next week, Standard Chartered now expects an additional 1.5% in cuts by the middle of this year. As with New Zealand this would see the official cash rate in Australia hit a low of 2.0%, which again the economists expect will be the low point in the cycle.
The problem with the moves in both cases, according to Standard Chartered, is it would add to, rather than ease, concerns over the balance sheet issues present in both economies. While Australia enjoyed a terms of trade boost last year from higher commodity prices, this should be short-lived in Standard Chartered’s view, while New Zealand’s trade figures for December were even worse than expected.
For New Zealand there is the added problem of a cash deficit as well, given tax revenues in recent months have fallen well short of expectations. In the economists’ view, this increases the chances of New Zealand suffering a ratings downgrade, particularly if the market sees the latest and expected future cuts to rates as simply attempts to delay the inevitable adjustment the economy requires.
