Why the RBA Won’t Follow New Zealand in Cutting Rates Just Yet

The Reserve Bank of New Zealand (RBNZ) cut interest rates by 0.25% to 2.75% this morning. This latest cut was the third one the RBNZ has made in the space of just three months.

For Australia, the question is whether we’re next. The Reserve Bank of Australia (RBA) has cut rates twice this year, to 2%. Another cut by the end of this year seems probable. It’s just a matter of when, not if. Why? The Aussie economy is faring no better than NZ’s.

Like the RBA, the RBNZ is grappling with the problem of slowing exports and growth. Instead of commodities though, the Kiwis are struggling with weak dairy prices.

Yet the effect on both economies remains the same. Both are seeing national incomes and investment plunge. Consumers meanwhile are responding by cutting back on spending too.

It’s the same story everywhere.

Exports are slowing as a result of price slumps. Most of this is down to China’s slowdown affecting demand for goods. But there’s a broader slowdown across most emerging markets. In our case, China imports the lion’s share of Aussie minerals.

The RBNZ’s third rate cut in four months is a response to this. But it won’t lead to a similar reaction from the RBA, at least not yet. Why?

It all comes down to timing.

The third economic quarter has almost passed us. Growth between July and September is largely set in stone. There’s only a few weeks of September left.

By December we’ll know whether the economy managed to avoid recession in Q3. But that’s also why a rate cut makes no sense. Nothing the RBA does at this point will change economic performance in Q3. It’s simply too late to act. This leaves November as the most realistic opportunity to slash rates again.

There won’t be a US rate hike to boost Aussie exports

The RBA will have to cut rates again this year for one simple reason: there’s no help coming from the US.

The RBA had been relying on US interest rates hikes to boost the Aussie dollar.

The dollar has dipped to US$0.69 in recent weeks. But its slide coincides largely with China’s economic slowdown. Yet it’s these same worries about the global economy that explains why the US will keep rates steady.

A US rate hike could have given the Aussie another permanent ‘boost’. And it could have sent the dollar a few cents lower from its present level.

That would’ve been be a timely boost giving import costs are rising in China. But it’s too late for any of that now. The RBA will wait for more proof of an economic downturn before cutting rates again.

Make no mistake, it will cut again this year. A rate reduction beyond September is almost certain. As mentioned, there is rising sentiment suggesting a recession in Q3.

Avoiding this will require growth of at least 0.2%. But it’s hard to see where growth will come from amid poor economic data. Trade is down and business and consumer sentiment are sinking. The one thing that could prevent a recession is if government spending shows another splurge in Q3.

That could delay the RBA’s decision for a few months. But it will need to boost the export sector again. That’s especially true if, as expected, US rates remain on hold until next year.

RBNZ lowers economic growth forecasts as more cuts loom

The RBNZ made an interesting observation in its official statement. It noted how annual GDP growth of 2% was new territory. The last time the RBNZ cut rates, growth forecasts were at a healthier 2.5%.

A lot has changed in the space of two months though.

Yet that’s the standard for developed economies these days. Few nations are capable of growing at above 3% anymore. Even the RBA finds anything above 2% as acceptable.

The only difference between NZ and Australia is where our respective cash rates sit. At 2.75%, the RBNZ still has scope to cut further. It’s made certain of that too. The RBNZ said that ‘some further easing in the official cash rate seems likely’.

Of more interest is the forecast for the NZ economy over the next six months.

Capital Economics, a consultancy, thinks that growth in NZ will fall to 1.8% by March. That would suggest a recession in NZ economy to be just around the corner. It also expects its unemployment rate to rise 0.7% which would make it 6.5%.

Here’s what Capital Economics had to say:

We are not expecting a recession. [But] we wouldn’t be surprised if there was one. [We] think that even after today’s downward revisions the RBNZ’s new economic forecasts are still [too] optimistic’.  

Substitute RBA for RBNZ, and you’d be describing Australia’s own situation.

Brazil and Canada are having their recessions. New Zealand appears well on its way to one. Yet somehow the RBA still claims Australia will survive unscathed? We’ll have to wait and see.

But if we see a rate cut by November, it’ll be a sign that we’ve entered recession in Q3.

Mat Spasic,

Contributor, Markets and Money

PS: Last week the Reserve Bank decided to hold interest rates at 2%. But we haven’t reached a floor yet. According to Markets and Money’s Phillip J. Anderson, interest rates will remain at historic lows for a long time yet.

Phil’s written a brand new report, ‘Why Interest Rates Could Stay Low for the 21st Century’. In it, he warns that you won’t be able to rely on your savings to fund your retirement.

Inflation stemming from low rates will eat into your savings. Worse still, you won’t be able to rely on savings accounts to fund your retirement. The regular return on term deposits has halved in the last four years alone.

But there is another way. Phil’s eager to show you the best way to invest in this low interest rate environment. He’s prepared a four-step strategy that could boost your wealth. You’ll learn where to park your cash over the coming decades. And you’ll see how this could lead to immeasurable profits…To download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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