New Zealand’s economy unexpectedly contracted in the final three months of last year, which led to a recession and initially sent the currency lower as traders boosted bets on interest-rate cuts.
According to government data, Gross Domestic Product (GDP) dropped 0.1% in the fourth quarter after declining 0.3% in the prior three months.
Economists had expected 0.1% growth. GDP has shrunk 0.3% from the year-earlier period, worse than estimates of nil growth. The economy has tipped into a double-dip recession in the face of the Reserve Bank’s aggressive monetary policy tightening as it attempts to bring inflation under control. Weak growth is likely to increase pressure on policymakers to consider a pivot to cuts earlier than they had indicated.
The RBNZ has held the Official Cash Rate at 5.5% since May, and last month hinted it didn’t intend to lower rates until 2025, citing record immigration and stubborn core inflation.
“The downward surprise for GDP tilts the balance in favor of OCR cuts coming sooner than the mid-2025 timeframe,” said Nathaniel Keall, economist at ASB Bank in Auckland. “We continue to expect cuts from the second half of 2024.”
Rate-cut bets rose after the report, with the yield on policy-sensitive two-year bonds down nine basis points to 4.54%, the lowest since 16 January 2024. The New Zealand dollar also fell initially, extending the year’s decline to 4% before paring losses as the US currency dropped.
Pressure on New Zealand to consider easing policy comes as Federal Reserve officials on Thursday kept their outlook for three rate cuts this year, while on Tuesday, the Reserve Bank of Australia decided to drop its tightening bias.
Earlier this month, RBNZ Chief Economist Paul Conway stated that the bank might start cutting sooner than expected if the Fed begins easing later this year, while the International Monetary Fund on Wednesday said that it sees the scope for OCR rate cuts later this year.
