New Zealand’s economy is in a deep hole.
As illustrated below by Justin Fabo from Antipodean Macro, real GDP contracted sharply in the June quarter, drastically underperforming the Reserve Bank of New Zealand’s forecast:
The number of filled jobs in New Zealand has also contracted sharply:
As a result, the Reserve Bank on Wednesday chose to slash the official cash rate by an oversized 50 bps, taking the cash rate down to 2.50% from a peak of 5.50%.
Committee members reached a consensus on the 50 basis point reduction without needing to hold a vote.
“Household consumption is recovering, partly because of lower interest rates, and elevated commodity prices continue to support the primary sector. House prices are flat, and residential and business investment remain weak”, the Reserve Bank’s media release said.
“Cautious behaviour by households and businesses could slow the economic recovery, reducing medium-term inflation pressure. Alternatively, higher near-term inflation could prove to be more persistent”.
“More timely indicators suggest that economic activity recovered modestly in the September quarter, but there remains significant spare capacity in the New Zealand economy”.
“The case for reducing the OCR by 50 basis points emphasised prolonged spare capacity and the associated downside risk to medium-term activity and inflation”, the Reserve Bank said.
Major Bank ASB had called for a 50 bp rate cut, but other economists were divided between 25 bp and 50bp.
Bond traders had priced a 35 bps cut into market prices ahead of the decision, suggesting they thought a smaller cut was more likely.
