NZ: Problems at the Diary

New Zealand’s economy is slowing, quite sharply, as a number of its former stimuli fade. Admittedly, the available data hasn’t been that weak thus far and consequently the RBNZ has continued cautiously with its easing of policy. We suspect that the Bank remains influenced by its ‘residual optimism’ over the outlook for China. However, we fear that the economy, especially its agriculture-related sectors, may be at risk of falling prey to a balance sheet recession. If such a balance sheet recession takes place, we expect the RBNZ to reduce the cash rate to 1.5% and the NZD to fall into the mid-fifties range relative to the USD.