INVESTORS and some economists now expect New Zealand’s central bank to start cutting interest rates next week as markets globally ramp up bets on imminent monetary policy easing.
The Reserve Bank of New Zealand (RBNZ) will cut the Official Cash Rate (OCR) by 25 basis points to 5.25 per cent in its Aug 14 Monetary Policy Statement and deliver two further reductions to 4.75 per cent by the end of the year, Bank of New Zealand head of research Stephen Toplis predicted on Tuesday (Aug 6) in Wellington. Investors expect even more rapid action, with the OCR falling from 5.5 to 4.5 per cent by November, swaps data show.
“The economy is buckling, inflation is controlled,” Toplis said. “Given the lags between rate moves and their impact on the economy, and the current parlous state of New Zealand, we strongly advocate that the Bank starts a progressive easing cycle from the August meeting.”
Such a move would be a swift reversal of stance from the RBNZ, which in May considered raising rates and said it would not cut them until the second half of 2025. But investors are increasingly concerned that the US economy may be on the verge of a recession, and they now expect the Federal Reserve and other central banks to cut rates more aggressively.
In New Zealand, recent indicators point to a significant economic downturn. Gauges of activity in the manufacturing and services sectors slumped deeper into contractionary territory in June, while inflation slowed more than economists and the RBNZ expected to 3.3 per cent in the second quarter.
New Zealand’s economy shrank in the second quarter and will shrink again in the third, Westpac’s New Zealand economics team forecast today. That would be the third instance of two consecutive quarterly contractions since the end of 2022 – a triple-dip recession.
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Labour market data due Wednesday will show the unemployment rate jumped to 4.7 per cent in the second quarter from 4.3 per cent in the first, according to a Bloomberg survey of economists.
The RBNZ softened its stance in its July rate review, acknowledging signs of declining activity and opening the door for policy to ease sooner than previously signalled.
“There is little sense in the Bank waiting to cut,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, who expects RBNZ easing to start next week and to total 100 basis points this year. “The market is already there, so there is no point chasing.”
Capital Economics also predicts that RBNZ rate cuts will start next week.
‘Credibility issue’
Still, economists at Westpac and ASB Bank forecast they will start in October, while ANZ Bank and Kiwibank expect the RBNZ to wait until November.
“We are not convinced the RBNZ will pull the trigger next week,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “They should, but it’s still unlikely.”
It would be hard to go from pushing out rate cuts and raising the probability of hikes in May to cutting in August, Kerr said, adding “there’s a credibility issue for the RBNZ’s forecasting team”.
But Toplis said delaying rate cuts now risks being forced into bigger moves later.
“The central bank is supposed to take into consideration the minimisation of volatility in output and interest rates when setting policy,” he said. “To delay cutting much longer risks maximising such volatility.” BLOOMBERG
