Slow growth equals low interest rates

Statistics NZ says the economy declined by 0.6% in the December quarter and this figure is worse than the forecast consensus of minus 0.2%.

In addition, Stats NZ revised downwards its previous version of 2% growth in the September quarter to 1.7%.

As a result, ASB economist Nathanial Keall now expects the Reserve Bank will raise the official cash rate (OCR) by just 25 basis points in April, down from an earlier prediction of 50 basis points.

“Inflation remains much too high, and the near-term outlook is especially worrisome,” Keall says.

“However, the weaker starting point for economic activity and increased financial markets jitters overseas suggest less urgency for RBNZ rate hikes.”

Keall expects the OCR will peak at 5.25%.

Kiwibank economists stuck with a 5.50% peak, but acknowledged a “downside” to that forecast.

They also predicted a 25 point rise in the OCR in April.

Westpac's acting chief economist Michael Gordon agreed the OCR would go up by 25 points in April but had a lower end point: 5.00%.

Several economists have pointed out that the latest numbers predated the floods and cyclone of January and February, and so the figures could be worse for the current quarter.

Paradoxically, the amount of work required to clean up the mess could actually increase gross domestic product (GDP) later, but economists describe this as a “poor quality” contribution to GDP, and so should have a limited impact on the OCR.