The RBNZ has just cut the cash rate by 50 basis points to 1.00%, mirroring the two interest rate cuts from the RBA. This was more dovish than previously expected, with 18 out of 25 economists polled by Bloomberg expecting a 25-basis point cut. The Kiwi fell 2% on the shock announcement, bringing NZD/ USD down to 0.6442. The news is positive for New Zealand stocks, which are more attractive to investors when compared to fixed interest securities that will be re-priced on lower yields.
Alongside interest rate cuts in Australia, New Zealand’s decision substantially reduces the number of highly-rated sovereigns with an interest rate above 1%. The Monetary Policy Committee cited a need for further monetary stimulus to meet inflation and employment objectives of the central bank. The committee did express satisfaction with a small improvement in New Zealand’s labour market, but still cut rates as a pre-emptive measure to help combat a slowing economy. Monetary policy has a 12-18-month time lag before its effects are seen in the real economy, underscoring the need for central banks to act pre-emptively to address the economic weakness. It also cited similar interest rate cuts in other major trading partners, saying that the current 50bps rate cut will help the central bank by bringing it in line with global peers.
The decision of New Zealand’s central bank underscores deteriorating economic fundamentals globally, which investors should be aware of as the bull market continues. It is also likely that the next global recession will be accompanied by negative interest rates worldwide, given that the central banks with the highest interest rates have less than half the room to cut rates that they typically use to combat a recession. Such a development would be unprecedented and spur significant growth in the $15tn negative yielding bond market, where investors accept a guaranteed loss on capital if they hold bonds to maturity.