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Economists now expect August rate cut from RBNZ

Wednesday 26th June 2019

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Economists say the central bank will cut interest rates in August given the monetary policy committee said risks are tilted to the downside and that more support from monetary policy was likely to be necessary. 

The Reserve Bank kept the official cash rate at 1.5 percent and said the outlook for the economy has softened since its May assessment. All 20 economists polled by Bloomberg had expected the bank to stand pat. Last month it cut rates by 25 basis points, citing concerns about the employment and inflation outlook.

"Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower official cash rate may be needed over time to continue to meet our objectives," the central bank said in a statement today. 

The summary of the meeting said the monetary policy committee discussed a possible rate cut today, but reached a consensus to keep the OCR unchanged. However, "the members agreed that more support from monetary policy was likely to be necessary." 

Ben Udy, Australia and New Zealand economist for Capital Economics, said the statement was enough to shift his view.

"Overall, the dovish tone of today’s statement suggests the bank may cut earlier than we had initially anticipated. We now expect the bank to cut rates to 1.25 percent at its next meeting in August compared to our previous forecast of November. What’s more, there is a growing risk that this may not be the last cut this year," he said.

ANZ Bank also brought forward its forecast cuts.

"The Reserve Bank has made it clear that they are likely to cut again sooner rather than later. We have been talking about this risk for some time, but now the RBNZ has confirmed their take on recent developments we are now officially bringing forward our forecast cuts to August and November," chief economist Sharon Zollner said. 

The policy assessment confirmed that an easing bias was in place, ASB senior economist Mark Smith said. 

Every official cash rate decision point is now "live" for a potential cut and "we are becoming increasingly skeptical that conditions are in place to trigger a pick-up in growth momentum from the second half of 2019."

ASB expects a 25 basis point rate cut by the RBNZ in August.

"Future moves in the OCR are likely to remain data-dependent and will also be contingent on global events, the actions of overseas central banks and the New Zealand dollar," said Smith.

Infometrics said the RBNZ's lack of confidence in the economic outlook sends a "clear signal" that the bank intends to cut the cash rate in August.  However, it expects 1.25 percent will be the low. While the bank was downbeat, it noted that inflation is expected to rise to the 2 percent mid-point of its target range, and employment will remain near its maximum sustainable level.

Infometrics said that suggests "limited scope for further rate cuts without a further significant deterioration in the economic outlook."  

The New Zealand dollar rose after the statement and OMF treasury manager Stuart Ive said the market had already priced in further rate cuts "so it was nothing really new." The kiwi was trading at 66.59 US cents at 2:50pm versus 66.36 cents just prior to the release. 

It also gained against the Australian dollar and was trading at 95.52 Australian cents from 95.30. 

The RBA cut its cash rate by 25 basis points to 1.25 percent on June 5 and markets are expecting two more rate cuts there this year. 

"It could be argued RBNZ may cut a further 25 basis points where the RBA are more likely to cut by 50 basis points," said Ive. "This is clearly making NZD look attractive against the heavily traded NZD/AUD cross. The pair has broken resistance and has plenty of upside space from a technical perspective." 

(BusinessDesk)



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