(Bloomberg) -- New Zealand’s central bank said the country is experiencing a pronounced economic downturn that could get worse.
“Households have reduced their discretionary spending and businesses have put investment plans on hold,” the Reserve Bank said in its semi-annual Financial Stability Report Tuesday in Wellington. “While business confidence is recovering as inflation and interest rates fall, significant further weakening in the economy remains a risk.”
New Zealand’s economy contracted in the second quarter and is projected to have shrunk further in the three months ended September, putting it back in recession. A report tomorrow is expected to show the jobless rate increasing to 5%, a four-year high.
The RBNZ kept monetary policy restrictive for much of 2022 and 2023 before it began cutting interest rates in August. It stepped up the pace last month, when it lowered the Official Cash Rate by 50 basis points to 4.75%, and most economists expect another 50-point reduction at the final rate decision of the year on Nov. 27.
The impact that high interest rates had on business investment and employment is still being felt, Governor Adrian Orr told reporters at a news conference.
“We are talking about an economy where interest rates are now declining and some of that financial pressure is easing,” he said. “But we know that the real economy lags behind that. Getting through that tight period is always a concern.”
Orr said policymakers don’t want surprises or shocks to the downside during that period.
“We’d love to see a far more normal business cycle improve and come back,” he said.
The RBNZ acknowledges that rising unemployment will cause financial difficulties for some households but banks are in a strong financial position to manage loan defaults and they continue to be profitable, according to today’s report.
“Banks expect the non-performing share of their lending to increase, although still well below previous recessions,” the central bank said. “The financial system is well positioned to continue providing credit to the economy, even if the downturn gets worse.”
(Updates with governor’s comments in fifth paragraph)
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