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RBNZ Poised to Cut Rates Again, May Signal More to Come

Matthew Brockett

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New Zealand’s central bank is poised to cut interest rates to a fresh record low and may hint it’s not done yet as the economy cools and global peers ease policy.

The Reserve Bank will lower the official cash rate by a quarter point to 1.25% on Wednesday, according to 18 of 21 economists in a Bloomberg survey. Many expect another reduction before the end of the year.

“We see another cut in November to 1%, and there could well be further cuts beyond that,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “The economy should be growing faster than it is. There’s a risk that it continues to undershoot its potential and instead of more inflation pressure you get less.”

Weak business and consumer confidence are weighing on hiring and spending, damping growth and keeping inflation below the midpoint of the RBNZ’s 1-3% target band. The bank is also under pressure to keep step with a global shift toward lower borrowing costs so that the New Zealand dollar doesn’t strengthen, which could hurt exports and reduce imported inflation.

The RBNZ will publish its decision at 2 p.m. in Wellington on Wednesday along with fresh forecasts for growth, inflation and the OCR. Governor Adrian Orr will hold a press conference an hour later.

Markets are certain the central bank will deliver a cut tomorrow and have almost fully priced in another move in November, swaps data show.

The RBNZ, which is mandated to deliver both price stability and maximum sustainable employment, cut rates in May, getting a head-start on peers such as the Australian and U.S. central banks, which have since followed suit. Although it held rates steady in June, it said then that “a lower OCR may be needed over time to continue to meet our objectives.”

ANZ Bank New Zealand economists this morning predicted the RBNZ will lower the cash rate three more times this year, taking it to 0.75% in November. They cited an escalation in the U.S.-China trade war after China allowed its currency to depreciate.

The domestic outlook has also softened. While inflation accelerated to 1.7% in the second quarter, economists expect it to weaken again. The economy’s annual growth rate has fallen to 2.5%, the slowest in more than five years, and a further deterioration is expected.

An RBNZ report today showed inflation expectations dropped to 1.86% -- below the bank’s 2% goal for the first time since early 2017.

Bucking the trend, labor market data also released today were unexpectedly strong. The jobless rate dropped to 3.9% in the second quarter, an 11-year low, and wages surged after the government increased minimum pay rates.

Unconventional Policy

“The sharp fall in the unemployment rate is unlikely to prevent the RBNZ from cutting rates tomorrow given the volatility in labor market data,” said Ben Udy, an economist at Capital Economics in Singapore, who expects the bank to cut again in November. “Given the weakness in business surveys, alongside the recent declines in the logging prices and a higher minimum wage, we think the unemployment rate will rise over the rest of 2019.”

As the cash rate falls further into uncharted territory, reducing the RBNZ’s ability to counter an unexpected shock, there is increased discussion about what non-standard measures it might turn to, such as bond purchases or negative rates. The bank said last month that it’s taking another look at its unconventional policy strategy, though this was “at a very early stage.”

“It’s re-doing its homework on that front and it’s very timely that it does, because we do risk heading into territory where the OCR starts to lose its traction,” said Tuffley. “If the global economy deteriorates markedly and puts more pressure on us, you may well find the Reserve Bank needs to look at other measures to get some stimulus.”

(Updates with inflation expectations in 10th paragraph)

--With assistance from Tomoko Sato.

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Chris Bourke, Tracy Withers

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