New Zealand GDP contraction dials back interest rate hike expectations
NEW Zealand’s economy unexpectedly contracted in the third quarter and significant downward revisions were made to economic growth in earlier quarters, leading the market to pull back on bets of further interest rate hikes next year.
Official data out in New Zealand on Thursday (Dec 14) showed gross domestic product fell 0.3 per cent in the September quarter, well below analysts’ forecasts of a 0.2 per cent rise as a number of industries including manufacturing and construction saw activity slow, and household spending eased.
Second-quarter growth was revised to 0.5 per cent, down from the 0.9 per cent reported initially. Annual GDP decreased by 0.6 per cent, Statistics New Zealand data showed, whereas the market had expected an increase of 0.5 per cent.
Following the release of the data bank bill futures surged as the market priced out any chance of another hike from the Reserve Bank of New Zealand (RBNZ) and a near-certain rate cut by July.
Two-year swap rates were down 20 basis points at a seven-month low of 4.945 per cent, having already fallen after a dovish policy outlook from the US Federal Reserve, which held rates steady but flagged expectations of interest rate cuts next year.
The kiwi dollar pared its gains but was still 0.6 per cent firmer at US$0.6174 as the US dollar reeled in the wake of the Fed’s outlook.
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The RBNZ had forecast third-quarter GDP growth of 0.3 per cent, and the weaker-than-expected figure will likely hearten the central bank, which has repeatedly said it needs slower economic growth to dampen inflation and inflation expectations.
Westpac New Zealand senior economist Darren Gibbs said taking into account the revisions to previous quarters and the economic contraction in the third quarter, the overall size of the economy was a “whopping” 1.8 per cent smaller than the central bank forecast at its November meeting.
“This will reduce the bank’s estimate of the degree of inflation pressure that remained in the economy during that quarter – all else equal, lowering the prospect of a rate hike, at least as soon as the next meeting on Feb 28,” Gibbs said.
The RBNZ has undertaken its most aggressive policy tightening since 1999, when the official cash rate was introduced, lifting it by 525 basis points since October 2021 to 5.50 per cent.
In November, the central bank signalled it could hike rates further if it decided inflation and inflation expectations were not heading towards its target band of 1 to 3 per cent.
New Zealand’s annual inflation has slowed in recent quarters and was 5.6 per cent in the third quarter. REUTERS
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