Reserve Bank of New Zealand quickens pace of monetary easing

Summary

The Reserve Bank of New Zealand (RBNZ), in a widely expected decision, cuts its policy rate by 50 bps to 4.75% at today's announcement. The central bank said growth is subdued and the economy is now in a position of excess capacity, while it also assesses that inflation has returned to the target range.

By the time of the next RBNZ announcement in late November, several data releases are likely to further confirm the weak growth environment, and well as provide more concrete evidence of a reduction in price pressures. Against this backdrop, we forecast another 50 bps rate cut, which would take the policy rate to 4.25%. Thereafter, we expect a steady series of 25 bps rate cuts in February, April, May and July of next year, bringing the policy rate to a low of 3.25%.

Overall, we now see the RBNZ easing policy a bit further, and a bit more quickly, than we had previously envisaged. That could also weigh on the New Zealand dollar over time, suggesting downside risk to our medium-term NZD/USD target.

RBNZ steps up pace of monetary easing

The Reserve Bank of New Zealand (RBNZ) stepped up the pace of its monetary easing at today's announcement, lowering its policy rate by 50 bps to 4.75%, an outcome that was widely expected by market participants. Explaining its decision to lower interest rates aggressively, the RBNZ said:

Economic activity in New Zealand is subdued, in part due to restrictive monetary policy. The central bank noted weakness in consumer and investment spending, and employment.

The New Zealand economy is now in a position of excess capacity, encouraging price- and wage-setting to adjust to a low-inflation economy.

Global economic growth remains below trend.

It assesses that CPI is currently within the 1% to 3% target range, and indication that its expects Q3 headline inflation to come in below 3%. Moreover, the RBNZ said inflation is converging on the 2% midpoint.
Even with the decision, RBNZ policymakers agreed that a policy rate of 4.75% is still restrictive, which combined with the central bank's economic assessment, offers a clear signal of further rate cuts at upcoming announcements.

Download The Full International Commentary