RBNZ: What to watch for next week’s rate decision
The Reserve Bank of New Zealand’s (RBNZ) October 9 decision to cut the Official Cash Rate (OCR) by 50bps to 4.75% marked a significant step in its easing cycle. This dovish move, coupled with the expectation of another 50bps cut in November, underscores the central bank’s confidence in managing inflation and its pivot towards bolstering economic growth. Despite persistent headwinds in some areas, the RBNZ remains optimistic about stabilizing inflation within its 1-3% target range over the medium term, while addressing sluggish economic activity.
Inflation Dynamics: Victory in Sight, But Risks Remain
New Zealand’s inflation outlook has improved substantially, with the annual headline CPI slowing to 2.2% in September. The RBNZ’s inflation expectations survey reinforces this progress, showing well-anchored pressures near the 2% mark. However, core inflation and non-tradables prices remain sticky, with persistent cost increases in services like local council rates and insurance. The RBNZ recognizes that inflation pressures are not uniform, with business and consumer inflation expectations largely normalizing, yet lingering risks could complicate their path forward.
Governor Orr’s remarks on October 23 highlighted the need for vigilance against unanticipated risks. He emphasized a measured approach to rate adjustments, balancing the need for swift action when necessary with caution as inflation eases.
Economic Activity: Signs of Stabilization Amid Sluggish Growth
The broader economic picture remains mixed. While some sectors show signs of flattening after last year’s downturn, overall growth remains subdued. GDP growth stagnated in August, printing at 0% month-on-month, with downward revisions to prior figures amplifying the need for further monetary support. Weak business and consumer spending, coupled with a softening labor market, paint a cautious outlook. Employment conditions have deteriorated, with the unemployment rate rising to 4.8% in Q3, driven by younger individuals leaving the workforce for education. Wage growth, however, has moderated, aligning with stable inflation expectations.
November Outlook: Another 50bps Cut in Sight
The RBNZ’s near-term focus remains on delivering additional rate cuts to support growth while maintaining inflation stability. The market has fully priced in a 50bps cut at the upcoming November meeting, with Governor Orr reinforcing the Bank’s confidence in a measured approach to easing. STIR markets have the cash rate falling to 3.50% by mid-2025, reflecting the central bank’s commitment to balancing risks and fostering a gradual recovery.
Global Risks and Domestic Headwinds
Externally, the global landscape presents fresh challenges. The recent U.S. election and the potential for renewed trade tensions with China under President Trump add a layer of uncertainty for New Zealand’s export-driven economy.
Conclusion: Navigating a Delicate Balance
The RBNZ’s actions signal a cautious optimism, underpinned by progress in curbing inflation and the early effects of easing financial conditions. Yet, significant risks remain, from domestic spending challenges to global economic uncertainties. As the RBNZ continues to navigate this delicate balance, its data-dependent approach will be critical in achieving sustainable growth and inflation targets.
For now, the NZD maintains a bearish bias, with rallies likely to face selling pressure. Traders and policymakers alike will closely monitor upcoming economic indicators, with the November 27 policy statement set to provide fresh insights into the Bank’s projections and strategic direction. If the RBNZ only cut by 25bps then expect a sharp move lower in the AUDNZD pair, but remember that AUD CPI is released just before the RBNZ decision next Wednesday.