New Zealand's Central Bank Welcomes Weaker Currency for Economic Growth
Reserve Bank of New Zealand (RBNZ) welcomes a decline in the New Zealand dollar (NZD), anticipating its role in stimulating economic growth in 2025 and beyond.
Lower Kiwi Dollar to Boost Exports
"The lower kiwi dollar contributes to our forecast of economic recovery from the end of 2024," said Reserve Bank Chief Economist Paul Conway. He attributes the positive impact to increased export revenue, supported by favorable commodity prices for dairy and beef.
The NZD has depreciated 6.4% against the US dollar over the past six months, the most substantial decline among the 10 most traded currencies. This coincides with monetary policy easing in New Zealand and the election of Donald Trump, resulting in higher US interest rates and a more attractive greenback.
Economic Forecast and Interest Rate Outlook
RBNZ has reduced its Official Cash Rate (OCR) by 50 basis points for the third consecutive meeting, bringing it to 3.75%. The economy is projected to grow 2.4% in 2025, following an estimated 1.4% contraction in 2024. Export and tourism growth, accounting for 30% of the economy, is expected to offset sluggishness in housing and business investment.
Governor Adrian Orr asserts that the NZD is trading near fair value. Conway emphasizes that RBNZ remains neutral on the currency's level. However, he acknowledges that its decline, driven by economic fundamentals, acts as a shock absorber for the economy.
Conway reiterates that RBNZ's forecasts indicate a 75 basis point reduction in the OCR to 3% in the coming quarters. However, he emphasizes the conditionality of these projections.
Inflation and Monetary Policy
Despite expectations of domestic inflation hovering around 3%, Conway maintains that it aligns with broader inflation targets of 2%. He expresses confidence that the anticipated increase to 2.7% in 2025 will not become entrenched and emphasizes the central bank's willingness to overlook this temporary surge.
Conway highlights excess economic capacity and the significant output gap, making it challenging for firms and workers to increase prices or wage demands. Consequently, policymakers currently rule out the prospect of interest rate hikes.
However, Conway acknowledges the risk of needing to cut the OCR below 3% to stimulate economic growth. He cites the sharp economic contraction in 2024 and the uncertainty in predicting when the economy will turn around.
"While our central projection anticipates recovery, there's a possibility that the economic weakness persists, requiring additional stimulus," he concludes.