Economic Week, May 10

by Nick Clark


Our slowing economy has prompted the Reserve Bank to cut the Official Cash Rate to 1.5%. 
A cut was always on the cards after the markedly softer tone taken by Governor Adrian Orr at the last OCR review back in March.  The question wasn’t so much whether the Reserve Bank would cut the OCR but when it would be cut, with opinion finely balanced between acting at this review or waiting to a bit later in the year, say in August.
Although inflation is slightly below the mid-point of the 1-3% inflation target and employment is broadly at the targeted maximum sustainable level, the newly-established Monetary Policy Committee decided a lower path for the OCR was appropriate. This reflected economic projections and the balance of risks to inflation and employment. 
Over the past couple of years the economy has slowly but steadily become sluggish and the Reserve Bank thinks it needs a kick-start to get it going again. 
The banks responded by passing on at least some of the 25 basis point cut to their mortgage rates and the NZ Dollar dropped sharply immediately after the announcement.
Where to next?  The Reserve Bank’s forecast for an OCR of 1.4% by March 2020 is roughly equivalent to half a further cut. This allows for the possibility of further OCR cuts, but does not commit the Reserve Bank.  It will look to see how the economy plays out over the coming weeks and months.
A lot will depend on how the economy responds to this cut and other economic developments both overseas and within New Zealand. 
Overseas, although commodity prices have been strong in recent months, the US-China trade war is heating up, there is heightened tension in the Middle East, ongoing Brexit paralysis, and anaemic growth in Europe.  As the global economy slows and the risks increase, most central banks have, like ours, moved from being hawks or fence sitters to doves.
In New Zealand, we’re waiting for the ‘Wellbeing Budget’, whatever the Reserve Bank decides with bank capital requirements, and how other government policies (for example, climate change, employment law, and tax) affect business and consumer confidence.
Monetary policy needs mates and if other government policies aren’t helping to make the economy more productive and competitive then the effectiveness of the OCR cut will be diminished.  In which case all it might do is give a short-lived spurt to the housing market and see any interest savings to borrowers eaten up by higher prices.

And of course those with savings won’t be happy to see their already low bank deposit rates drop even further.
The OCR will next be reviewed on 26 June.

Commodity Prices Up
The ANZ World Commodity Price Index pushed up 2.5% for the month of April, following an upwardly revised 4.1% rise for March.  This resulted in a year-on-year increase of 2.1%.
Dairy prices gained 4.4% in April having moderated from the strong 9.6% lift in March, with prices supported by tighter global supply.  Meat and wool prices also gained a solid 3.8%, with stronger prices for both beef and lamb, with both benefiting from extra demand from China in the wake of an outbreak of African swine fever impacting on its domestic pork supplies.
A lower NZ Dollar in April helped provide a further boost to prices.  The ANZ NZD index lifted 4.2% in April, following a 4.1% increase in March, taking the year-on-year increase to 8.4%.

GDT up again
The Global Dairy Trade auction posted its 11th straight increase this week, increasing 0.4%.
The overall rise came despite the third consecutive fall for whole milk powder (which slipped 0.5%), larger falls for butter milk powder, cheddar, and lactose, and a no-change for butter.  However, these were more than offset by increases for skim milk powder, anhydrous milk fat, and rennet casein.
The average selling price was $US3,490 and 15,375 tonnes were sold.
The GDT has risen at every auction since late November and has increased 28.4% over that time.  It is also up 3.8% on the same time last year.

Mixed picture for livestock numbers

The final results for Statistics NZ’s 2018 Agricultural Production Survey showed that as at 30 June 2018, the number of:

  • Dairy cattle was 6.4 million, down 144,000 (or 2.2%) from 30 June 2017;
  • Sheep was 27.3 million, down 231,001 (or 0.8%);
  • Beef cattle was 3.7 million, up 105,000 (or 2.9%); and
  • Deer was 851,000, up 15,000 (or 1.8%).

 The statistics also broke down the livestock numbers by region.  Manawatu-Whanganui had the most sheep (5.1 million), followed by Otago (4.9 million) and Canterbury (4.4 million).  Manawatu-Whanganui also had the most beef cattle (554,000), followed by Waikato (517,000) and Canterbury (512,000).  Waikato had the most dairy cattle (1.8 million) followed by Canterbury (1.3 million). 

Cereals yields up slightly
Cereals yields were up 3% compared to last season, according to a survey by the Arable Industry Marketing Initiative. 
With the 2019 harvests of milling wheat, feed wheat and malting barley all largely completed by 1 April, overall hectares harvested was up 3% on last season, with a 7% increase in total tonnage harvested. This was despite poor weather in some regions and subsequent concerns leading into harvest.
Unsold stocks on hand of last year’s feed wheat and feed barley crops were low, at 0.9% and 2.4% of the 2018 harvest tonnages.  Stocks of unsold feed wheat from the current harvest were up 2% on the same time last year, while unsold stocks of feed barley were up 36% and unsold stocks of milling wheat were down 14%.
Looking ahead, AIMI predicts autumn/winter sowings of feed wheat to be down by 3,800 hectares on predicted sowings a year ago, with feed barley down 4,100 ha, milling wheat up 1,000 ha, malting barley down 100 ha, milling oats down 1,300 ha, and feed oats up 600 ha.   However, these predictions are based on intentions as only 10% of crops had actually been sown by 1 April.

Banking Survey open
Federated Farmers’ Banking Survey is now open.  The six-monthly survey is held in May and November, and undertaken for us by independent research company Research First. The survey provides a good barometer for how farmers perceive their bank relationships.  In recent times satisfaction with banks has slipped, albeit from previous strong levels.
To have your say, and go into the draw for an Air New Zealand Mystery Break, click this link to take the survey
The survey is open until Tuesday 14 May and results should be available either at the end of May or start of June.

NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 9 May) continue to most of the North Island, except East Cape and Taranaki, as well as Nelson and Southland-South Otago in the South Island significantly drier than usual for this time of year.

Exchange Rates

The OCR cut caused the NZ Dollar to drop sharply although it recovered most of its losses over the next 24 hours.  However, despites its recovery over the course of the week, the NZ Dollar was down against the TWI and against all of our major trading partners. 


NZ Dollar versus

This Week


Last Week (2/5/19)

Last Month (9/4/19)

Last Year (9/5/18)

US Dollar





Australian Dollar










UK Pound





Japanese Yen





Chinese Renminbi





Trade Weighted Index





Source: Reserve Bank of NZ


Wholesale Interest Rates

The OCR cut helped push down the 90 Day Bank Bill rate but the 10 Year Government Bond Rate was stable. 



This Week


Last Week (2/5/19)

Last Month (9/4/19)

Last Year (9/5/18)






90 Day Bank Bill





10 Year Government Bond





Source: Reserve Bank of NZ