Interest Rates Cuts May Not Help New Zealand

Since July, the Reserve Bank of New Zealand has slashed interest rates by 475 basis points. However, in our opinion these rate cuts may not bring the expected relief.

In fact, New Zealand's economy slipped into a recession in the first quarter of last year amid a drought, high energy costs and a slump in the housing market. Moreover, domestic downturn is well established as fast deterioration in global growth is causing weakness in flagging exports of milk, meat, timber and wool. In addition, the highest unemployment rate in five years and expectation of further deterioration of the economy are making consumers to cut spending.

Indeed, at Trading Economics we think that interest rates cuts may not be able to revive falling demand. First of all, with annual inflation at 3.4 per cent, rates are already negative in real terms. What's more, 85 percent of New Zealand home loans are fixed so rate cuts don't have immediate effect on financing costs. Part of the problem are also high household debt levels, which are similar to the US and UK, at 160 per cent of disposable income. Simply, even if some sort of stimulus packages would be introduced it is not likely that consumers will borrow more since they currently fighting with previous debts.

Anna Fedec,
2/3/2009 4:12:20 PM