The Reserve Bank of New Zealand will be meeting this week, on August 10 at 2100 GMT for its monetary policy review. At the meeting, the RBNZ is expected to lower the OCR by 25bps, bringing the official cash rate to 2.00%, from 2.25%. The RBNZ held the OCR steady for nearly four months. The central bank cut rates by 25bps back in March this year.
The overnight index swaps currently implies a 99% chance for a rate cut, showing that the markets are heading into the event pricing in the probability for an OCR cut. Low inflation has kept the RBNZ on a rate cut cycle. In July, the RBNZ published an unscheduled economic outlook report where the central bank signaled that there would be a rate cut at the August policy review meeting. The statement from July’s economic outlook report showed that the RBNZ was clearly not comfortably with the strength of the NZD’s exchange rate, which is seen to be about 6% higher than what the central bank expected. The New Zealand dollar has been trading near the 0.72 – 0.725 price range for most of last week and only a more dovish RBNZ statement could push the kiwi lower. Expectations for the RBNZ to maintain its easing bias remains with the market participants speculating that another rate cut will be delivered around the November policy meeting.
Economists from Westpac note, “The factors dampening inflation are just too pervasive. As a result, this week’s OCR cut is likely to be accompanied by a statement along the lines of “further easing may be required”. And we expect that the RBNZ will follow through with a further 25bps cut in November.”
Economists from Commerzbank note that “the NZD is still trading close to its annual highs – and the generally expected rate cut next week will hardly change anything. This is mainly because the FX market does not expect the Fed to make a further rate hike in the foreseeable future which is weighing on the dollar. The RBNZ will therefore probably underline its readiness to make further rate cuts and then hope that the next rate hike by the Fed will come soon; without the tailwind from the Fed, it will be difficult for the RBNZ to weaken its currency on a lasting basis and hence approach its inflation target”
A few institutions, such as Kiwibank suggest that the RBNZ will have to eventually lower the OCR to as much as 1.50% by early next year. Echoing similar views was Stephen Toplis from BNZ who says, “if the RBNZ remained fully committed to pushing CPI inflation higher then it had absolutely no option but to cut the OCR this Thursday, pencil in at least one further reduction and commit to ongoing rate cuts if need be.”
Inflation in New Zealand also hit the lower band of the RBNZ’s inflation target band led by weaker prices and earlier weakness in Oil prices. However, the temporary factors are expected to lift pointing to a pick-up in inflation, albeit at a gradual pace. Last week’s inflation expectations data showed a modest pick with inflation expected to rise 1.70% in the third quarter. In the second quarter, consumer prices increased 0.40% on a quarter over quarter basis. This was lower than the projected 0.60% from the RBNZ’s forecasts.
