New Zealand is sinking into recession. What will the RBNZ decide on rates?

New Zealand is in recession as Thursday's GDP data showed, which in the first quarter shrank by 0,1%, below forecast Reserve Bank of New Zealand at 0,3%. Fourth quarter GDP was also revised down by 0,7%. The data reduces the chances of a further increase in interest rates.

Weakness of the New Zealand economy

According to data Statistics New Zealandeconomic weakness was widespread, and the production of half the country's industry was shrinking. Growth was disrupted by the impact of large cyclones and flash floods in Auckland in January and February. Employment in New Zealand remains strong, limiting the impact of the recession on many people.

However, though recession technical in nature after two consecutive quarters of contraction, it has become a significant political issue as New Zealand approaches elections in October this year and voters grapple with higher living costs.

Inflation in New Zealand remains at 6,7%, well above the 1-3% target range set by the central bank.

No more rate hikes in New Zealand?

Economists say signs of a slowdown will be welcomed by the central bank, which said in a statement it was trying to engineer recessions to contain inflation in its most aggressive tightening since the introduction of the cash rate in 1999.

The cash rate, which is now at a 14-year high of 5,5%, has increased by 525 basis points since October 2021, and the central bank said at its last meeting in May that the cash rate had already peaked.

It seems that as the demand pressure on inflation continues to weaken, the arguments for interest rate cuts will become increasingly convincing.