New Zealand's economy slowed sharply in the quarter ended June, sending the currency sliding and backing views that the central bank will keep interest rates low for longer in the face of global uncertainty. Gross domestic product rose a seasonally adjusted 0.1 percent in the April-June quarter from the first quarter, well short of a 0.5 percent forecast in a Reuters poll and 0.6 percent projected by the Reserve Bank of New Zealand (RBNZ).
In the January-March quarter, the economy posted a surprise rise of 0.9 percent, suggesting the domestic economy was resilient and in a much better shape than feared after February's devastating earthquake in Christchurch. The latest data pointed to patchy activity, just as the Federal Reserve warned of significant risks to the already weak US economy, prompting markets to push back the risk of a New Zealand rate hike to April from March next year.
"The pace of growth has disappointed, appearing slightly less impressive than initially thought, just a few weeks ago," said ASB bank economist Jane Turner. "We continue to expect that the RBNZ will wait until March 2012 to lift the cash rate." The New Zealand dollar fell three quarters of a cent to a low $0.7975 from $0.8050 before the data. Interest rate futures rose as much a four points in later dated paper as investors pushed out rate increase expectations.
After the data, market pricing implied no rate rise until April next year, from March earlier. The amount of tightening over the next 12 months also fell to 32 basis points from 37 bps. It had more than 100 bps priced in a month ago. Analysts also pushed out their forecasts, with an updated Reuters poll showing 12 of 18 analysts expecting the first RBNZ rate move in 2012 from 10 before the data. The rest are sticking with a start this December.
Markets have been battered with the risk of a slowing US economy as the Fed launched a new plan to lower long-term borrowing costs to kick-start growth that has slowed to a crawl over the first half of the year. Reflecting an uncertain outlook, RBNZ Governor Alan Bollard reiterated in New York that rate increases will take time. He also repeated that a strong New Zealand dollar has moderated demand, which should make it tough for the central bank to tighten rates at this time.