The market is in as close to agreement as it can be that the RBNZ will cut rates when its May meeting ends on Tuesday. But there is considerable uncertainty about what it will do after that, allowing for the chance of a 50bps cut. Which means more chance of volatility in the markets as traders try to figure out what comes next.
Traditionally the Aussie and Kiwi move in tandem, given the similarities between their economies. The situation in China and the potential effects of tariffs have put a bit of a wobble in that tradition of late. However, given the RBA’s cut last week, the trend would be to expect a similar move from the RNBZ. But, also last week, New Zealand’s central bank published a quarterly business survey that sowed some doubts about what’s going to happen.
Strong Vote From Economists
According to Reuters’ latest polling (which was conducted before the quarterly business review), 97% of economists project a 25 bps cut in the OCR at the upcoming meeting. Two thirds then expect a rate cut at the meeting after that. This expectation of rapid easing has left some analysts calling for a 50 bps cut, to give a clearer signal to the markets.
They point to the deteriorating global economic conditions plus the lackluster budget that has left investors uninspired in New Zealand’s growth prospects. In other words, the RBNZ will have to do the heavy lifting to get the Kiwi economy growing enough to prevent inflation from falling past the target and into deflationary territory. That would pose an even bigger headache for the central bank.
The Three Scenarios
Analysts the outcome of the meeting falling into three categories. The first, and which isn’t considered all that likely, is a 25 bps cut followed by no meaningful change in the RBNZ’s forward guidance. Given the global situation, they could do this by leaning on the uncertainty narrative that has been popular with other central banks.
The other, possibly less likely scenario is for the RBNZ to rip the bandaid off, as it were, and go for a 50 bps cut. This would be a substantial shift in the bank’s policy, and would likely come with some implications of further easing. The “shock and awe” tactic would be aimed at boosting the internal economy, but would likely weaken the currency.
What’s Likely to Happen and the Market Reaction
The more likely scenario is that the RBNZ will deliver 25 bps and leave the door wide open for further rate cuts ahead. But it can still leave some volatility in the Kiwi as traders who have bet on the other scenarios readjust. One of the factors that makes this more likely is that the RBNZ is functioning under an interim Governor. Christian Hawksby is at the top post for six months pending a formal appointment. As a caretaker administration, the bank might be more inclined to not want to shake things up too much.
How much of a market move there will be will likely depend on how much of a surprise there is. And that could be a bit tricky to gauge, as it could come down to how investors interpret Hawkesby’s commentary. Overall, the market expects easing, so it’s just a debate of how fast the cuts will be, and therefore how week the New Zealand dollar can get.
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