Expectations of deeper easing emerged after data showed gross domestic product contracted 0.9% in the second quarter, three times more than the RBNZ had forecast. — Bloomberg
WELLINGTON: New Zealand’s central bank is expected to cut interest rates this week, with economists divided over how aggressively it will respond to the weak economy.
The Reserve Bank’s (RBNZ) Monetary Policy Committee (MPC) will lower the official cash rate or OCR by 25 basis points to 2.75% in Wellington, according to 15 of 25 economists surveyed by Bloomberg. The remainder predict a 50-point cut to 2.5%.
Expectations of deeper easing emerged after data showed gross domestic product (GDP) contracted 0.9% in the second quarter, three times more than the RBNZ had forecast.
At the same time, the economy is projected to recover in the second half of the year and policymakers may decide against a knee-jerk reaction to the poor GDP number.
“There is a very real risk that the bank is spooked by the weak GDP figures and cuts 50 points,” said Doug Steel, senior economist at Bank of New Zealand in Wellington. However, he expects the RBNZ to cut by 25 points “and maintain a clear easing bias”.
The RBNZ will publish its decision soon. Because it is a rate review rather than a monetary policy statement, there is no press conference and the bank won’t update its economic forecasts.
Some economists argued that a smaller cut with dovish messaging will give the RBNZ time to assess upcoming data and be more aggressive in November if needed.
The counter argument is that the second-quarter slump has created more spare capacity in the economy, which will damp inflation and supports calls for more stimulus.
Adding ammunition to that view, business confidence fell in the three months through September as firms remained downbeat about trading conditions, raising the risk of a third-quarter contraction, the New Zealand Institute of Economic Research reported recently.
“Today’s data increase the odds that the RBNZ delivers a 50-point cut,” said Miles Workman, senior economist at ANZ Bank in Wellington.
“We still think strategy favours a dovish 25-point cut, but today’s data move it toward the coin-flip realm. A 50-point cut would not be difficult to justify.”
Swaps data showed traders now saw a 42% likelihood of a 50-point cut, up from 31% previously.
The RBNZ has already slashed the cash rate by 250 basis points in little more than 12 months, but at 3% it is still considered neutral – neither curbing nor stimulating demand.
Kiwibank chief economist Jarrod Kerr said a 50-point cut would “give the RBNZ bang for buck”.
“It is not priced, it is not consensus, but it is needed,” he said. “A 50-point move would get wholesale rates down, lowering retail rates.”
Governor Christian Hawkesby last month reiterated the MPC’s central projection is for the OCR to fall to around 2.5% by the end of the year. In comments before the GDP release, he said that decline “could occur faster or slower” depending on the speed of the economic recovery.
Besides the slump in economic activity, New Zealand’s jobless rate has climbed to a five-year high of 5.2% while house prices hit a two-year low in August.
Inflation is expected to accelerate in the third quarter from 2.7% in the second but then slow toward the 2% midpoint of the RBNZ’s 1% to 3% target band in 2026. —Bloomberg
