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Economists say more RBNZ rate cuts are coming

Wednesday 8th May 2019

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The Reserve Bank of New Zealand cut rates by 25 basis points to a record low 1.5 percent and economists expect it to cut again. 

Changes to the central bank’s forecasts in the latest monetary policy statement now show a chance for another cut by March. The OCR track goes from 1.8 percent to 1.4 percent in March 2020. The bank's prior forecast in February had indicated the first move wasn't anticipated until the first half of 2021, and that that move would have been up.

The kiwi dollar fell sharply and was last trading at 65.83 US cents. Money markets are now pricing in a rate cut by the May 2020 meeting. 

"An easing bias remains, with the official cash rate outlook now 'more balanced,'" said ASB chief economist Nick Tuffley. 

According to Tuffley, the outlook implies a 50 percent probability of another cut but the next move in the OCR will likely be data-dependent.

"We have pencilled in August but feel the risks are skewed to a later move." 

Central bank governor Adrian Orr said at a press conference the new monetary policy committee has a "balanced" view. "We think we are in a good position to observe the data as it unfolds," he said. He acknowledged that the forecast track has a slightly lower path than just one cut  but said "the uncertainties around that are large."

In the policy statement, the central bank said "there is uncertainty about the global economic outlook. Trade concerns remain, while some other indicators suggest trading-partner growth is stabilising."

"Domestic growth slowed from the second half of 2018," it noted. "Reduced population growth through lower net immigration and continuing house price softness in some areas has tempered the growth in household spending. Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment." 

BNZ head of research Stephen Toplis said the bank not only cut the cash rate but also "intimated a clear desire to give it another nudge lower."

ANZ Bank said "the first cut is the deepest" and it continues to forecast that this is the just the start of a sequence of three cuts.  

Lower interest rates will support growth but "too-high interest rates are not this economy's problem at present," it said. By November "the ducks will have lined up for another cut, followed by one in February. In our view, deterioration in global conditions is the primary risk that could bring this forward."

Capital Economics Australia and New Zealand economist Ben Udy also argued that subdued economic growth and a softening labour market mean that "today’s interest rate cut by the Reserve Bank of New Zealand will be repeated before the year is out."

Udy said the central bank's growth forecasts are "still too optimistic." The central bank lowered its forecast for GDP growth in 2019 to 2.6 percent from 2.9 percent and in 2020 to 2.6 percent from 2.8 percent. 

Udy said that as it "becomes apparent that the economy is in worse shape than the RBNZ thinks, we think the bank will cut interest rates again."

He expects another rate cut in November. 


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