New Zealand Maintains Cash Rate At 1%, Australia Expected To Slash Further Amid Global Turmoil

The bank also recapitulated that there remains scope to further introduce fiscal and monetary policy stimulus, if the need arises to support the economy and meet the inflation targets while keeping employment at sustainable levels.

Current Status of New Zealand Economy

The Monetary Policy Committee, during its discussion, recapitulated that employment levels in the country are close to maximum sustainable levels, with consumer inflation remaining within the target level; however, it is below the 2 percent mid-point. The members of the committee also discussed the positive initial impacts of reducing the OCR in August 2019, which caused the retail lending interest rates for households and businesses to decline and the New Zealand dollar exchange rate to ease.

Currently, the escalated global trade tensions and political instability have continued to subdue the global growth outlook, that has also negatively impacted the demand for New Zealand?s goods and services. As a result, business confidence has been low in New Zealand, partly reflecting policy uncertainty and low profitability in certain sectors (especially the ones integrated with global supply chains), which has provoked the businesses to reconsider their investment decisions.

The second quarter (Q2 2019) GDP growth for the New Zealand economy was posted at 0.5 percent, followed by 0.6 percent growth in the March 2019 quarter (Q1 2019), demonstrating muted growth, but in line with the market expectations. According to Westpac Banking Corporation Limited (ASX: WBC), the annual growth for the year to June 2019 declined to 2.4 percent, the lowest since 2013, but back then the population growth was slower than it is today,. So, in terms of per capita GDP, the annual growth dropped to 0.8%, the slowest since 2011.

The housing market scenario has also been weak in New Zealand, which in turn impacted households? willingness to spend (the wealth effect). Thus, although household consumption growth was at 0.5 percent in the Q2 2019 quarter (0.4% rise in Q1 2019), it was down when compared to figures for the earlier quarters. Going forth, the market participants are expecting a recovery in the housing market in response to the recent sharp drop in mortgage rates, which should boost consumption. As businesses turned cautious of their expansion plans, the investment in plant and machinery also flattened out compared to strong growth in prior years.

On the international front, long-term interest rates are also presently trending close to historically low levels, consistent with low expected inflation and growth rates in the foreseeable future.

As growth outlook is expected to remain bleak in the short term before commencing recovery in 2020, the Reserve Bank of New Zealand is expected to keep the interest rates lower for a longer period of time accompanied by an increased government spending that would provide some boost to the domestic demand for the upcoming months. Additionally, low interest is conducive for improved household spending and construction activity, while the incentive for businesses to take up more investments will also be enhanced in response to demand pressures.

International Economic and Political Atmosphere

As discussed earlier, the scenario on the global front does not seem to calm down either, from worsening of the US-China trade and technology dispute with each passing day, developments in the Middle East, problems in Hong Kong and tensions between Japan and South Korea, to the British Prime Minister Boris Johnson?s futile efforts to reach a Brexit deal with the European Union, that continues to suffer setbacks.

In addition, the more recent headlines suggest that United States House of Representatives is planning to launch a formal impeachment inquiry against President Donald Trump, giving in to rising pressure from fellow Democrats after reports came in that Trump may have abused his presidential powers to seek help from a foreign government to undermine former Vice President Joe Biden, the current Democratic frontrunner, to increase the chances of his own re-election.

With the backdrop of a global political chaos and subdued growth outlook, the Reserve Bank of Australia?s (RBA) current governor, Mr Philip Lowe resolve to further ease the monetary policy is also expected to further harden, as he contemplates the outbreak of events on the global arena.

The global mayhem is wellbeing acknowledged by one and all and most of the major global central banks are anticipated to keep the interest rates at their lowest over the year ahead, while the United States and the European central banks having already taken the initiative to do so.

As Mr Philip Lowe addressed the Armidale Business Chamber on 24 September 2019, he also stated that households and businesses have grown used to ultra-low borrowing costs and that monetary policy easing does not have that high on impact as it used to once upon a time. Earlier, people would run off to banks to borrow to buy furniture or go on holidays or consider more spending whenever the interest rates were lower. That does not happen anymore.

Regardless, there is consensus amongst key economies to keep the interest lower, which causes a weakening in the exchange rate (depreciation of currency), making the exports from a particular economy cheaper, improving its terms of trade and strengthening the domestic activity. However, it is important to note that when a large number of central banks do this together, the required impact is likely to disappear. At the same time, a country cannot stand out to keep interest rates at stagnant, as its currency would appreciate in relative terms, making its exports expensive and causing capital outflows.

Therefore, given the current global environment, all the major countries are adapting to this shift to mitigate the consequences of a weak growth outlook and protect their domestic economy.