RBNZ seen cutting cash rate with economists split over magnitude

[WELLINGTON] New Zealand’s central bank is expected to cut interest rates this week, but economists are divided over how aggressively it will respond to the weak economy.

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) will lower the Official Cash Rate (OCR) by 25 basis points to 2.75 per cent on Wednesday (Oct 8) in Wellington, according to 15 of 25 economists surveyed by Bloomberg. The remainder predict a 50-point cut to 2.5 per cent.

Expectations of deeper easing emerged after data showed gross domestic product contracted 0.9 per cent 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 was spooked by the weak GDP figures and cuts 50 points,” said Doug Steel, senior economist at the 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 at 2 pm local time on Wednesday. Because it is a rate review rather than a Monetary Policy Statement, there is no press conference, and the bank will not update its economic forecasts.

Dovish messaging

Some economists argue 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 dampen inflation and supports calls for more stimulus.

The RBNZ has already slashed the cash rate by 250 basis points in little more than 12 months, but at 3 per cent it is still considered neutral, neither curbing nor stimulating demand.

Swaps data show traders see a 30 per cent likelihood of a 50-point cut this week. That creates an opportunity for the RBNZ, said Kiwibank chief economist Jarrod Kerr.

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“It’s exactly these sorts of odds that can give the RBNZ bang for buck,” he said. “It is not priced, it is not consensus, but it is needed. 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 per cent by the end of the year. In comments before the GDP release, he said that the 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 per cent while house prices hit a two-year low in August.

Inflation is expected to accelerate in the third quarter from 2.7 per cent in the second, but then slow towards the 2 per cent midpoint of the RBNZ’s 1 to 3 per cent target band in 2026.

Proponents of a deeper cut are encouraged that two of the six members of the MPC voted for a 50-point reduction at the August meeting. The RBNZ does not disclose voting details.

External member Bob Buckle left the committee last month, with former Rabobank head of rural banking Hayley Gourley joining it for this week’s decision.

Buckle was the most hawkish member of the MPC, so his absence may see more weight given to dovish views, said Kelly Eckhold, chief New Zealand economist at Westpac in Auckland, who predicts a 50-point cut.

“There doesn’t seem to be a good reason to delay a move to 2.5 per cent,” he said. “Quickly moving the OCR to a stimulatory level will generate confidence and activity ahead of the important Christmas and summer trading period.” BLOOMBERG