Reserve Bank of New Zealand pivots to rate cuts
|The Reserve Bank of New Zealand (RBNZ) kicked off its rate cut cycle at this week's meeting, lowering its policy interest rate by 25 bps to 5.25%. The decision was a mild surprise, with an overall majority of analysts (including ourselves) expecting the central bank would remain on hold. Several factors contributed to the pivot to monetary easing. The RBNZ cited slowing inflation and declining inflation expectations. Moreover, weak sentiment surveys and mixed labor market figures suggest spare capacity in the economy is likely to continue building, giving the central bank greater confidence that inflation will return to the target range in a timely fashion. In addition to reducing interest rates at this week's meeting, the RBNZ revised its projection for its policy interest rates to reflecting a faster pace of easing, reaching 3.85% by Q4-2025. Given the central bank's evident comfort in lowering interest rates this week (ahead of updated inflation figures), we see no significant impediments to further near-term rate cuts. We expect 25 bps rate cuts at each and every meeting through May 2025, as well as 25 bps rate cuts in August and November of next year. That would see the policy rate end 2024 at 4.75%, and end 2025 at 3.50%. A weak New Zealand economy and pronounced period of RBNZ monetary easing means we expect the New Zealand dollar to be an underperformer among the G10 currencies over the medium-term. We expect, at best, only modest gains in the NZ currency versus the greenback through the end of 2025. The Reserve Bank of New Zealand (RBNZ) sprung a mild surprise at this week's monetary policy announcement, delivering a 25 bps policy rate cut to 5.25%. The consensus forecast from analysts had been for the central bank to hold rates steady, although a sizable minority had expected the RBNZ to move at this week's meeting. The RBNZ's decision also represents a relative rapid pivot from the central bank—while the RBNZ's July announcement was reasonably balanced, as recently as May the central bank had delivered a hawkish statement, including an upward revision to it projected policy rate path, suggesting at that time there was still at least some risk the central bank could hike rates further. What then has changed between May and August for the RBNZ to lower its policy rate this week? On the price front, Q2 inflation surprised slightly to the downside, slowing to 3.3% year-over-year. To be sure, much of the deceleration was driven by tradables inflation, with non-tradables inflation showing a more gradual deceleration. Importantly, survey-based measures have also shown declining inflation expectations, while the Q2 Quarterly Survey of Business Opinion also showed a net 23% of firms increasing prices during the quarter, down from a net 35% that raised prices in Q1.Summary
Reserve Bank of New Zealand kicks off its rate cut cycle
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.