Reserve Bank of New Zealand Rate Decision Preview: The Federal Reserve pause may be infectious

• RBNZ expected to cut the official cash rate to 0.75%, a record low
• Weak inflation and expectations could prompt cut
• Slowing economy, rising unemployment, lower New Zealand Dollar additional factors

The Reserve Bank of New Zealand (RBNZ) will announce its decision on the official cash rate at 1:00 GMT Wednesday November 13^th, 20:00 EST on Tuesday November 12^th.

Forecast

The RBNZ is predicted to reduce the official cash rate by 25 basis points to 0.75%. If completed it would be the third cut this year and bring the reductions to 1.0% since the bank began in May.

RBNZ balancing inflation and growth and economic stabilization

New Zealand’s central bank may take its main interest rate to new low but the case for reductions is less clear than it was six months ago when it began this rate cycle.

Economists in the Reuters Survey expect the RBNZ to cut the official cash rate by 0.25% on Wednesday to 0.75% a record low for modern New Zealand. The futures markets was pricing a 76% chance for a reduction on Monday, up from 60% earlier.

RBNZ Official Cash Rate

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The RBNZ has been the most aggressive of the central banks reducing rates this year. It was the first to take steps to combat what it saw as weak inflation and slowing global and domestic growth.  Governor Adrian Orr started with a 0.25% decrease in May, followed by a 0.5% cut in August.

At the last decision the bank’s economic review stated that there was room for further stimulus “if necessary” but developments since have somewhat undermined the case for another 0.25% cut.

Consumer Price Index

Consumer prices in the third quarter rose at a 1.5% annual rate, slightly better than the 1.4% expectation though down from the second quarter’s 1.7% rate. Inflation has been stable this year averaging 1.57% through the third quarter with a range of 1.5% to 1.7%. 

CPI

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From 2015 through 2018 the range was much wider, extending from 0.1% in the first quarter of 2015 and again in the fourth quarter of 2016 to 2.2% in the first three months of 2017 followed by a dip to 1.1% in the first quarter of 2018.  The relative stability this year may be something the bank is reluctant to disturb.

Inflation expectations however in the fourth quarter dropped to 1.8% their lowest in three years, missing the 1.86% forecast and they have fallen from 2.11% in the first quarter of 2018.

Inflation Expectations

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Unemployment, GDP and business confidence

Unemployment climbed to 4.2% in the third quarter from 3.9% in the prior three months. But as the last quarter had the lowest rate since the financial crisis and the average in 2018 was 4.3% it is not necessarily sign of fatigue in the labor market. The economy grew at 2.1% pace in the first half down from 3.2% a year earlier.

Unemployment Rate

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Business confidence in October rose from an 11-year low perhaps prompted by the seeming trade detente between China and the United States.  The threat of their trade war and the dependence on the New Zealand economy on exports to the Asian market and China in particular had been one of the main reason behind the initial rate cut in May.

The New Zealand Dollar

The New Zealand Dollar also known as the Kiwi for the national bird, has been one of the weakest currencies against the US dollar this year. 

From its January high on the 31^st of 0.6912 it lost 9.7% to the low this year of 0.6244 on October 1^st.  Since then the recovery has been limited, closing at 0.6361 on November 11^th, down 7.9% from the January top. In comparison the Australian Dollar has lost 5.9% versus the US currency in the same period.  

Conclusion

The RBNZ’s early move to economic support will receive a final installment this month. The changing background, particularly the incipient trade deal between the US and China and the Federal Reserve halt, will likely induce a pause down under as well.