Further New Zealand rate cuts still a possibility

AMID the recent falling prices in dairy products - New Zealand's main export - and a weakening economic outlook on its home front, the Royal Bank of New Zealand (RBNZ) decided to carry out its third cut to their official cash rates (OCR) within a four month period starting from June 2015.

With this series of cuts, the RBNZ has pared rates down from 3.25 per cent to 2.75 per cent, bringing the New Zealand dollar (NZD) to its lowest against the Singapore dollar (SGD) in these past six years.

The question in the minds of most people now is: is this the bottom or is there a chance of further weakening of the NZD against the SGD?

This is not the first time that the RBNZ has cut its rates to stimulate the economy.

During mid-2007 to 2008, while mired by the global financial meltdown, RBNZ slashed its cash rates from 8 per cent to 2.5 per cent within a nine month period through a series of seven rate cuts starting from July 2008.

Drawing comparisons of the recent decision to cut rates with that from 2008, we see that prior to the cuts; NZD was trading at its respective recent highs against the SGD, S$1.20 in 2007 and S$1.10 in 2014.

After the cuts in 2008, NZD plunged 38 per cent against SGD, reaching a low of S$0.75. Meanwhile, after the cut on Sept 10, 2015, NZD spiralled down 21 per cent against the SGD to current levels of S$0.86.

In conclusion, if we were to use the decisions taken by RBNZ in 2008 as a benchmark, this would mean further rate cuts could still be a possibility, raising the spectre that the NZD could go even lower against the SGD.

For those of us looking to visit the land of the kiwis, this would be welcomed news as we can look forward to benefit from an increase in spending power.

However for those with investments tied to New Zealand, darker clouds could be on the horizon.