Photo:
New Zealand's economy being in worse shape than expected - and suffering through a deeper and longer downturn than the global financial crisis - may mean more interest rate cuts.
Stats NZ said on Thursday that gross domestic product (GDP) dropped 0.9 percent in the June quarter, a steeper contraction than had been expected.
Economists said that had increased the chance that the Reserve Bank would need to cut the official cash rate (OCR) more than earlier expected, which could bring down home loan rates, too.
Westpac chief economist Kelly Eckhold said it seemed more likely than not that the rate might have to drop to 2.25 percent, rather than stopping at 2.5 percent as had been expected before.
He expects a 50bps cut next meeting.
"If they do a 50bp easing in October there would have to be a remarkable turnaround in data to drop straight away."
He said home loan rates could settle at 4.5 percent or even a bit below.
ASB chief economist Nick Tuffley agreed that it was likely a rate lower than 2.5 percent would be needed. He said markets had moved from pricing in a rate of 2.5 percent to 2.35 percent.
"There's scope at the margin for rates to come down a bit further."
Miles Workman, senior economist at ANZ, said the market had priced in 33 basis points of cuts at the October meeting, which suggested there were expectations that a 50bp cut would be needed.
"However, the details of the GDP data suggest that not all of the negative surprise on the day was 'signal'. Some of it appears to be noise - the volatile changes in inventories component was quite a bit weaker than the RBNZ's forecast, but could just as easily go the other way in Q3.
"We continue to pencil in a 25bp cut in October, with a follow up cut in November, taking it to 2.5 percent. All else equal, the Q2 GDP data present some downside risk to that view. What the high-frequency data have to say about the likely rebound in Q3 GDP will be very important for accessing the overall state of momentum and efficacy of past monetary easing."
Infometrics chief forecaster Gareth Kiernan said the data on Thursday was "sufficiently bleak" that a 50bps cut to the official cash rate in October was a real possibility.
"The Reserve Bank's recent statements have talked a lot about potential output and spare capacity in the economy, and the GDP data being below expectations indicates that there is more spare capacity than the bank had previously been expecting.
"The weak export numbers raise questions about the robustness of the provincial-led recovery - export prices have been good, but weak volumes suggest that farmers' bank accounts might not be improving as quickly as we'd hoped. Given that we saw that transmission path as a relatively slow burn anyway, given the cautious approach that farmers take around their spending, better growth might take a bit longer to materialise than previously thought."
Kiernan said partial economic indicators for the September quarter have looked a little more positive, but not outstandingly so.
"There will probably not be a lot of evidence for the bank before November that growth is strong enough that it should be keeping rates on hold, rather than cutting again.
"If the bank cuts by 50 points in October, I see a real chance of further 25-point cuts in November and possibly February, meaning that 2.5 percent now seems unlikely to be the trough for the official cash rate."
Jarrod Kerr, chief economist at Kiwibank, said the Reserve Bank had not yet delivered the appropriate monetary policy settings.
"We have been advocating for a 2.5 percent cash rate for over two years. And now it is crystal clear that current monetary policy settings, with a 3 percent cash rate, are not enough. We are advocating a 50bp move in October. Get it done. Get to 2.5 percent ASAP."
He said the Reserve Bank needed to show leadership.
"Stop mucking around and stimulate."
He said once that happened, debate could turn to whether there should be a move to 2 percent.
Workman said it did not look at though the economy was heading for a technical recession, which is usually defined as two quarters of economic contraction.
Eckhold said the economy was likely to have grown 0.6 percent in the third quarter of this year but activity would still be a low lower than had previously been thought, because of the big second-quarter drop.
Sign up for Ngā Pitopito Kōrero, a daily newsletter curated by our editors and delivered straight to your inbox every weekday.
