Last year the central bank undertook a tightening cycle that saw it hike interest rates four times – on Thursday it cut key interest rate for the second time in a row, with another one flagged in September.
So what happened across the ditch for the kiwi economy to turn sour?
The answer can be linked to New Zealand’s most important commodity: milk. The dairy industry is to New Zealand what iron ore is to Australia.
In 2014, New Zealand exported $NZ14.5 billion ($13 billion) in dairy products, according to the nation’s department of trade and enterprise, double that of its second largest export, tourism.
That is around a third of overseas merchandise trade exports, Bank of New Zealand senior economist Doug Steel said.
The RBNZ’s statement on Thursday acknowledged the sharp fall in milk prices was a major reason to cut 25 basis points off its official cash rate to 3 per cent, and flagged more.
There are several global drivers causing dairy prices to fall. As the chart shows, the price has plunged 50 per cent since February, and more than 70 per cent since late 2013.
By comparison, iron ore, Australia’s key export, has fallen 20 per cent since February and 60 per cent since late 2013 and widely considered responsible for Australia’s sluggish economy.
Global glut
One reason for milk’s fall is a global glut. Tensions between Russia and the Ukraine in 2014 spilled into trade embargoes on Ukraine’s allies, and one of the fallouts were the bans on dairy imports from the European Union.
That milk had to go somewhere, Mr Steel said, and a weaker euro on the back of the Greek debt crisis has made European prices more competitive.
Meanwhile, demand for imported milk from the world’s most populous nation, China, has «softened enormously».
«There are a lot of questions around the true inventory in China, and the build up in stock was a lot bigger than previously thought,» Mr Steel said.
But he said the rest of the economy was growing, particularly sectors exposed to a falling kiwi dollar which is fetching around US65¢, down from US88¢ a year ago.
The kiwi has also lost ground against the Australian dollar, sliding from near parity in April to fetching around 90¢ now.
New Zealand’s GDP is around $240 billion. It has been growing, around 2.5 per cent.
But Mr Steel said it was unlikely dairy prices had bottomed.
«Those global factors are still in full swing, a lot of the momentum is certainly downwards, and we expect the next dairy trade options to fall, it’s just a question of how much,» he said.
«If you look at the cash flow impact of dairy prices to date, looking at the previous season we’re talking about $NZ7 billion less…. that’s a big chunk of income out of the system, something the Reserve Bank has taken into consideration,» he said.
New Zealand’s 11,000-odd farmers are also starting to feel the strain, with cash flows well below production costs.
Christina Leung, senior economist at the New Zealand Institute of Economic Research said as dairy incomes fell, it would have a downstream effect as farmers rein in spending, flowing through the the wider economy.
«That said, lower interest rates and a lower dollar are providing some buffer, and we do have pretty solid activity in some other sectors, like construction and tourism,» Ms Leung told Bloomberg.
Australian farmers, for now, aren’t under the same pressure. Morgans senior analyst Belinda Moore said Australian farmers were fetching much higher prices.
«Aussie farmers have received some of hte higher farm-gate milk prices over the past couple of years, but are cognisant of the global dairy environment,» she said.
Source: SMH