RBNZ faces crunch rates call amid uncertainty over pivot timing

NEW Zealand’s central bank faces a crunch policy decision this week, with economists and investors unsure whether it will start cutting interest rates or wait for further evidence that inflation is returning to target.

While 12 of 21 economists surveyed by Bloomberg expect the Reserve Bank of New Zealand (RBNZ) to keep the Official Cash Rate at 5.5 per cent on Wednesday (Aug 14) in Wellington, nine predict it will embark on an easing cycle. Traders see a 70 per cent chance of a 25 basis-point cut, swaps data showed late Friday.

“The risk of tight monetary policy overshooting has got real,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “We think the time for the RBNZ to cut is now, but a lot depends on how much its forecasts have shifted.”

The economy is showing signs of entering its third recession in less than two years and inflation has slowed more than the RBNZ expected. But some domestic prices remain sticky and cutting rates now – a year sooner than it signalled just three months ago – would be a big about-face for the Monetary Policy Committee.

“It is difficult to justify such a radical change in the RBNZ’s thinking based on the evolution of data in recent months,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland, who expects the first cut to come in November. “Waiting for more evidence of the state of play is justified and relatively low cost, given monetary conditions have already eased substantially.”

The RBNZ will publish its decision at 2 pm on Wednesday and governor Adrian Orr will hold a press conference an hour later. It is a quarterly Monetary Policy Statement (MPS) with fresh forecasts, and the RBNZ has traditionally preferred to make big policy decisions in conjunction with an MPS release.

If not now then soon

If policymakers decide against a cut, they are expected to throw open the doors to a move at the two remaining decisions of 2024 by saying they discussed lowering rates at this meeting.

“We think they will be positioning themselves to cut rates in the October and November meetings,” said Kelly Eckhold, chief New Zealand economist at Westpac Banking in Auckland. “They will leave open the option to scale up rate reductions beyond 25 basis points should conditions warrant but will be looking to discourage markets from getting too far ahead of themselves.”

Investors have ramped up bets on central banks cutting rates since jobs data in the US signalled the risk of a recession in the world’s largest economy. The Federal Reserve is expected to start its easing cycle next month and 100 basis points of cuts are anticipated by the end of the year.

In New Zealand, investors are pricing at least 75 points of easing by year-end and 200 points by July 2025.

The RBNZ softened its tone at its July rate review, suggesting it was rethinking the surprisingly hawkish bias it displayed in May when policymakers discussed a rate hike.

But while the latest data point to a contracting economy and easing price pressures, some economists have noted the lack of a smoking gun that would prompt the RBNZ to cut rates immediately.

Unemployment rose to 4.6 per cent in the second quarter, the highest in three years, but it was slightly lower than market expectations and in line with the RBNZ’s forecast.

Inflation slowed to 3.3 per cent – more than the market and the RBNZ expected – but ongoing stickiness in domestic prices such as rents, insurance and local government levies may remain of concern to the central bank.

It aims to keep inflation around the 2 per cent midpoint of its 1 to 3 per cent target band.

An RBNZ survey published last week showed inflation expectations have dropped significantly and are now anchored around 2 per cent across a two-to-10-year horizon. But the survey of business leaders and forecasters had just 33 respondents.

“All the signs point to monetary policy really starting to bite hard, which the RBNZ is becoming alert to,” said Tuffley. “But it’s a close call.” BLOOMBERG