JP Morgan forecasts OCR at 3.25% by end of 2009

JP Morgan has cut its forecasts for global growth, for Australian growth and for New Zealand growth. It is now forecasting the Official Cash Rate in New Zealand will be cut to 3.25% by the end of 2009, including another 100 basis point cut to 5.5% on December. Here is the full details of JP Morgan's forecast below.

In light of recent downgrades to our global growth forecasts and our lower forecast for growth in the Australian economy, we have downgraded our GDP forecast for New Zealand in 2009. We also have adjusted our profile for future changes in the RBNZ's official cash rate (OCR). In particular, we now anticipate consecutive quarterly declines in global GDP growth in the current quarter and the first quarter of 2009, and a recession in Australia. The Kiwi economy already has endured a technical recession - GDP contracted 0.3%q/q in 1Q and 0.2% in 2Q "“ but downside risks to economic growth now have become much more acute in recent weeks. Interest rate sensitive sectors already are suffering, but the rapidly deteriorating outlook for the global economy will be a bigger drag on exports and investment than we previously forecast. We expect export volumes to fall 1.3% in 2009. Weaker NZD will prevent further decline, but the NZD/AUD cross-rate is strengthening "“ Australia is New Zealand's largest export destination, so local competitiveness is being squeezed. Weighing further on the outlook for Kiwi exporters, we have downgraded our forecast for Aussie growth in 2009 to just 0.7%, down from the previous forecast of 1.4%, and now forecast recession, the first since 1990-91. We also forecast the RBA will lower the cash rate to 4.0% by end-2009. In response to these developments, we have downgraded our GDP forecast for New Zealand to just 0.4% in 2009, from 0.8% previously. We maintain our forecast that household spending will experience an extended period of adjustment. Interest rates are still high, the housing market is deteriorating rapidly, and labour market conditions loosening as businesses facing tight credit conditions cut costs. We forecast that data next week will show employment growth contracting 0.5%q/q in 3Q, pushing the unemployment rate up from 3.9% to 4.3%. The prolonged recession we expect in New Zealand, the problematic global economic and financial market outlook, sagging domestic house prices, the falling terms of trade, and the improving prospect that inflation will return to the RBNZ's target range more quickly than under our earlier forecasts point to even more assertive policy easing from the RBNZ. Indeed, we now expect the RBNZ to cut the OCR 100bp to 5.5% in December (previously, we had forecast only a 50bp move). Amid expectations the RBNZ will frontload future adjustments to the policy rate, we forecast that two more 50bp rate cuts will follow the December move. We expect a string of quarter point adjustments thereafter, taking the cash rate down to 4% by mid-2009 and 3.25% by end-2009.