Kiwi economy needs rate relief – economists
The US Federal Reserve’s bold 50bp rate cut has boosted market confidence and may set the stage for New Zealand to consider similar easing, according to Kiwibank.
Kiwi economy struggles under tight monetary policy
New Zealand’s economy is feeling the squeeze, with economic output contracting in five of the last seven quarters. The latest GDP data showed a 0.2% decline, far below expectations and adding pressure on the Reserve Bank (RBNZ) to act.
“Our latest economic report card proves that restrictive monetary policy has done enough damage to restrain inflationary pressures. Enough is enough,” said Kiwibank economists, Jarrod Kerr and Mary Jo Vergara (pictured above, left to right).
Calls for aggressive cuts by RBNZ
With the RBNZ already having cut rates in August, another 50bp cut is expected by the end of the year, but experts argue that the RBNZ needs to do more.
“A rate cut in October is as close to a done deal as you get. In fact, we’d argue the only discussion should be on delivering 25 or 50. We’d advocate 50. And again, 50 in November,” said Kerr and Vergara, emphasising that a rapid reduction to a neutral cash rate of 2.5-3% is necessary.
Market reactions and future projections
Kiwibank traders observed that markets are pricing in substantial rate cuts by RBNZ, with expectations of further easing in the next few months.
“Kiwi yields plumbed new lows under weaker offshore data and the Fed delivering a -50bp cut,” said Ross Weston, head of balance sheet at Treasury, noting that the market anticipates aggressive action from the RBNZ.
The road ahead for the Kiwi dollar
Despite recent volatility, the Kiwi dollar has shown resilience, buoyed by softer US dollar performance and a slight recovery in commodity prices.
“A larger than anticipated cut from the Federal Reserve last week saw the US dollar remain on the back foot,” said trader Mieneke Perniskie.
However, the future direction of the Kiwi will largely depend on how quickly RBNZ moves to cut rates and the overall economic response.
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
