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RBNZ to cut rates and signal more to come

Monday 5th August 2019

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The Reserve Bank of New Zealand is expected to cut rates on Wednesday and leave the door open for more easing as heightened global uncertainty is coupled with a subdued domestic outlook. 

Of 17 economists polled by Bloomberg, 16 expect the central bank to cut rates by 25 basis points to 1.25 percent. Only one – Citi – sees the bank remaining on hold.

“The market would be gobsmacked if the RBNZ didn’t deliver the 25-basis point cut that is now almost fully priced in. The real interest lies in the bank’s forward messaging,” said BNZ Markets head of research Stephen Toplis.

Ongoing jitters around US-China trade tensions worsened late last week when US President Donald Trump vowed to impose a further 10 percent tariff on US$300 billion of Chinese imports from Sept. 1, just as the two sides had resumed talks. 

Prior to that, the US Federal Reserve had already lowered the target range for the federal funds rate to 2-to-2.25 percent, citing the implications of global developments for the economic outlook as well as muted inflation pressures.

Australia’s central bank has also already cut rates to 1 percent, also citing trade disputes. While it isn’t expected to cut on Tuesday, it is expected to keep open the possibly of further easing.

However, New Zealand’s monetary policy committee won’t only be worried about the global backdrop.

The RBNZ held rates steady at 1.5 percent in June but said a lower OCR “may be needed” given the weaker global outlook and the risk of ongoing subdued domestic growth.  Data since then has confirmed this, said ANZ Bank chief economist Sharon Zollner.

Signs for second quarter gross domestic product growth are weak, house prices are falling at a national level, log prices have crashed, dairy prices have dipped and oil prices are a little lower, she said.

She expects the central bank to leave the door open for another cut to 1 percent, which she anticipates will take place in November.

“That said, the risks are rapidly tilting towards another rate cut next year, or faster rate cuts, should the economy fail to recover its mojo,” she added.

 ASB Bank chief economist Nick Tuffley agrees. He expects the official cash rate to plateau in November at 1 percent but said “we still see the balance of risks to the global and domestic outlook skewed to the downside, and the RBNZ could quite easily find itself needing to do more if downside risks materialise.”

The cash rate could even move below zero but “when push comes to shove, we believe the OCR could conceivably go as low as 0.5 percent,” he said.

According to Tuffley, the “depth and length of the trough in the OCR remains conditional on the global and domestic outlook, the extent of persistence of recent low inflation out-turns, the actions of global central banks, the New Zealand dollar, and whether bank deposit interest rates will be sufficiently high to attract funding for banks." 

BNZ's Toplis said last week’s ANZ dismal business opinion survey was “the straw that broke the camel's back” and he also expects another cut in November, taking the cash rate to 1 percent.

A net 44.3 percent of the 363 respondents to the ANZ Business Outlook expect general business conditions will deteriorate during the coming year, compared with 38.1 percent in June. Optimism about their own activity also dimmed.

The survey “joins a long list of leading indicators that suggest growth in New Zealand is likely to slump to levels well below that which the Reserve Bank is expecting,” he said.

Unlike other economists, Citi's Josh Williamson said he expected the central bank to remain on hold at 1.5 percent but said the policy guidance should remain dovish.

He expects the bank repeat that a lower official cash rate may be needed but said the committee “should continue to focus on the balance between the downside risks to global growth from geopolitical tensions and ongoing weak domestic business sentiment versus the likelihood of stronger government spending and the better starting point for 2019 of first quarter GDP growth being stronger than expected.”

The economy grew 0.6 percent in the first quarter, in line with economists' expectations, but above the central bank's pick of 0.4 percent. 

Westpac Bank, meanwhile, is also expecting a cut to 1.25 percent and said the central bank will “strongly signal the possibility of further cuts without making any commitment.”

It currently expects the RBNZ to cut again in  November but “a very weak labour market report would see us bringing that forward to September, and would create a risk that the OCR could fall below 1 percent.”

The labour market data is due Tuesday. Economists are expecting an employment rate of 4.3 percent versus a prior 4.2 percent, according to Bloomberg. 

Kiwibank chief economist Jarrod Kerr, meanwhile, expects the central bank to eventually cut to 0.75 percent by early 2020, due to “heightened global uncertainties and a deteriorating outlook domestically.”


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