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RBNZ seen keeping rates on hold but signalling more cuts to come

Monday 24th June 2019

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The Reserve Bank of New Zealand is expected to keep rates on hold at Wednesday’s review but will signal further cuts are possible. 

All 20 economists surveyed by Bloomberg expect the official cash rate to stay at 1.5 percent but 11 expect a 25 basis point rate cut at the Aug. 7 monetary policy review. The central bank is due to publish the rate decision and a short statement at 2pm Wednesday. 

“We expect the RBNZ to hold the OCR at 1.5 percent in June, but to acknowledge the risk profile and signal that the future direction of the OCR is likely downwards,” said ASB Bank senior economist Mark Smith. 

In May, the central bank’s monetary policy committee opted to cut the OCR by 25 basis points to a record low and its forecasts signalled the benchmark rate could go lower.

According to Smith, New Zealand’s economic momentum has slowed. While gross domestic product grew 0.6 percent in the March quarter – higher than the central bank’s forecast of 0.4 percent - the underlying details were softer. In particular, services GDP only expanded by 0.2 percent.

ASB is “becoming more concerned moderate growth momentum is likely to translate into increasing labour market slack within the economy,” Smith said.

Moreover, the inflation backdrop remains benign and global developments have soured, he said.

New Zealand's central bank now has a dual mandate to support maximum sustainable employment and keep annual inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent. The consumers price index rose 0.1 percent in the March quarter, bringing the annual rate of inflation to 1.5 percent, down from a 1.9 percent pace in December. 

Adding to the pressure on the RBNZ is the fact that overseas central banks have moved to a more dovish stance.

The Reserve Bank of Australia and European Central Bank have both signalled easier policy is in the wings. Meanwhile, US Federal Reserve dropped its pledge to remain “patient”, but instead says it will “act as appropriate”, which analysts interpret as indicating the world's biggest central bank will start cutting its benchmark rate. 

ANZ Bank New Zealand chief economist Sharon Zollner also expects the central bank to remain on hold and to “reaffirm they remain data dependent and open-minded about whether another OCR cut will be required.”

Given central bank peers in Australia, Europe and the US have made a "coordinated dovish turn", the committee will be aware that if they don’t follow suit to some extent, the New Zealand dollar could rise, she said.

"We therefore expect some tweaks to head off this possibility, perhaps acknowledging that the risks of a further OCR cut are growing, while stopping short of saying it’s a probability."

While ANZ doesn't expect the central bank to be overtly dovish, it has consistently forecast that the cash rate will be cut to 1 percent by early next. year. 

ANZ economists recently published research arguing there is a very real chance that New Zealand's monetary policy will run out of conventional ammunition and suggested the central bank look at a series of unconventional measures, including quantitative easing.

Capital Economics also doesn't expect a cut on Wednesday. Given economic growth was stronger than the bank had expected and the government’s stimulatory budget, “the RBNZ is likely to take a wait and see approach" at this week's review.

However, it suspects that the current injection of stimulus – after the 25 basis point rate cut in May – won’t be enough to get underlying inflation back to the mid-point of the target or see the economy grow at its potential rate.

It said economic growth is likely to remain subdued, adding to spare capacity in the economy.

Capital Economics noted that, historically, the bank has tended to favour changing the cash rate at meetings which are accompanied by the release of its monetary policy statement, which happens in February, May, August and November.

"As such, the most likely timing for a rate cut is in August or November. We think August will probably be a little too soon given the better-than-forecast GDP growth in Q1 and the potential boost to activity from monetary stimulus," it said.

By the end of the year "we think it will become apparent that the economy is struggling to gain momentum, the labour market is deteriorating and that underlying inflation will have remained below target. We think that will prompt the RBNZ to cut rates once again to 1.25 percent,"  it said. 

Mark Lister, head of private wealth research at Craigs Investment Partners, said the market is pricing in a 22 percent chance of a rate cut this week, but the odds for a move at the next meeting jump to 81 percent. Approximately two further rate cuts are priced in over the next 12 months. 


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