New Zealand will be closing the latest cycle of interest rate meetings of the major central banks around the world.
The global bias continues to be on the easing side, with the exception of Norway. There hasn’t been much improvement in the economic situation in New Zealand. However, it’s too early to really see an impact from the 50 basis point cut that happened last time.
In early August, the expectation was for two cuts during the rest of the year. And it seems the RBNZ was trying to get ahead of the market by getting it over with, in one meeting.
Such drastic measures – the equivalent of four cuts within half a year – have left investors, traders and analysts more concerned about the country’s economic future. What can we expect going forward?
What We Are Looking For
The consensus view is that the RBNZ will want to see the effects of their latest action and hold the OCR where it is at a record low of 1.0%.
We can expect the bank to reiterate that they are ready for more action should it be warranted. Therefore, a continuing of a substantial dovish tone. There is no press conference scheduled for after the meeting. This is usually a sign that no action will be taken.
However, given the aggressive stance on rate cuts by Governor Orr and the new Monetary Policy Committee (MPC), no analyst really rules out the possibility of this being a “live” meeting.
There is still a minority less than 10% chance that a rate cut could be forthcoming. And the market appears to be pricing this in. We might see a minor “tightening” bump in the NZD following a hold, as a consequence.
Going Forward
The bank’s sudden action last month blew away the consensus expectation that there would be a further rate cut by the end of the year.
Now, RBNZ trackers are a little more cautious about policy predictions. The consensus is still that by April next year, the OCR will be at 0.75% (in other words, one more rate cut). However, there is hardly any consensus on when within that interval it will happen.
The MPC continues to be unanimous in its decisions, which gets in the way of tracking shifting views on the board, such as what happens with the Fed.
It now seems that unanimity is a feature of the RBNZ and that the potential of a split vote is becoming increasingly unlikely.
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It’s All Down Until It’s Not
As rates are slashed around the world, there is an increasing chorus – even among central bankers – of concern over both the unintended consequences and the effectiveness of close-to-zero-or-below rates.
This especially relevant for New Zealand (and Australia) as it traditionally keeps rates high in order to attract foreign investment. Even with the Fed cutting rates last week, the appeal of Kiwi carry trades is waning. We would expect this to further drag down the NZD.
Employment figures remain near structural level, just as they did last time before they slashed rates. And, inflation had ticked up a bit.
This has led many analysts to question whether the RBNZ’s rate path is actually a good idea. The criticism considers that the policy is in response to external factors such as the effect of the trade war, and structural issues that are beyond the purview of the bank. Those analysts form what’s called the “shadow board”, which is showing increasing division about the rate path.
The Bank is Not Alone
Regardless of the concerns from analysts, there isn’t much expectation of a let-up in economic pressures in the near term.
The RBNZ has been at the forefront of the race to the bottom in interest rates. And without much change in the data since the start of the cutting cycle, there is an argument that more measures are needed.
However, there is also reason to question whether more of the same will accomplish anything. We’ll be really keen to see this month’s data, and the quarterly figures that start coming out in a couple of weeks’ time.
