New Zealand's central bank is expected to unwind all of last year's rate rises by the end of the year as sliding dairy prices, slowing activity and plunging confidence prompt economists to lower their forecasts, and even talk recession. Four local analysts have moved this week to forecast the Reserve Bank of New Zealand (RBNZ) will cut its cash rate to as low as 2.5 percent, well beyond the signals the bank gave in its last statement just three weeks ago.
The RBNZ raised rates by 100 basis points (bps) last year, the first developed economy to do so, but after nearly a year on hold it joined the global easing party last month, spurred by weakening commodity prices, stubbornly low inflation, and a mixed global outlook. Westpac Bank on Friday joined ASB Bank, Deutsche and ANZ in forecasting another three rate cuts - in July, September and October. It had previously predicted two more cuts.
It cited a slide in business and consumer sentiment, weak dairy prices, a sell off in Chinese equities and the fallout from Greece's debt woes as the reasons for its new call for more aggressive easing, despite the counter arguments of a weaker exchange rate and the effects on an already heated property market.
"These developments must be considered in the context of a central bank that is under pressure to lift inflation towards 2 percent, is wary of further downside surprises to inflation, and is sounding rather dismissive of the inflation risks posed by rising house prices," said Westpac chief economist Dominick Stephens. Financial markets are pricing in a more than 90 percent chance of a 25 bps cut to 3 percent on July 23, with 55 basis points of easing over the next 12 months.
A Reuters poll consensus puts the cash rate on hold at 3 percent through the end of 2016. The Bank of New Zealand said the list of negatives for the economy could grow if the developing El Nino weather pattern aggravates drought in some parts of the country, investment falls, and migration eases from record levels. "Indeed, is not hard to envisage a scenario where a recession becomes imminent," said BNZ head of research Stephen Toplis. "While not our central scenario, it's easy to see how such a series of events could quickly tips the balance."
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