White Smoke at No.2 The Terrace?

After interest rates cuts in June and July, a reluctant RBNZ is under pressure from the market to deliver another cut at its September meeting and to signal more to come.  The only real question is what will tip it over the edge.

This week has been a torrid time for global markets, with volatility in equity markets not seen since the GFC.  Stepping back, the NZ macroeconomic backdrop has also changed considerably over the past 12 months.  Many of the sectors that had been providing tailwinds for NZ economic growth have now become headwinds. 

Not only have dairy prices fallen sharply, but they have reached a level where they are unsustainable for the NZ economy; a significant bounce in dairy prices is required to merely bring prices back to breakeven for dairy farmers.  At the same time, the peak of the Canterbury rebuild activity looks to have occurred earlier than expected.  Business confidence has also experienced a fairly broad based fall across the country, by region and sectors. 

As always, there are some pockets of offsetting news.  Exporters outside the dairy industry are benefiting from the lower NZD; tourism numbers are high; net migration remains near records levels; and there are anecdotes of a positive spillover from Auckland house prices into regional housing markets.