The RBNZ was one of the first to cut rates in the current cycle. However, now that the RBA has done so twice in a row, they seem to be a bit behind the curve. Compounding the pressure is the Fed’s rate cut last week which shrunk the yield divide.
It’s been quite some time now since markets have been pricing in a rate cut for August. So it would be quite a surprise if it didn’t happen!
Where we could get some market volatility, though, is from the accompanying monetary policy statement.
What to Look For
As if to confirm that there will be a rate cut this time around, there is a press conference for the Governor an hour after the rate decision. This is likely when we will get the key comment that will allow the market to price in expectations for what the bank will do in the future and what that means for the Kiwi.
One of the factors to look at is whether there was a split in the votes. So far, all the decisions made by the new committee have been unanimous. It will help us get some understanding of future decisions if we see who is likely to or is willing to dissent.
A split vote could move the markets as well, although this time around the chance of that seem remote given the how broad the consensus of a rate cut is.
The Path Forward
Many analysts are going so far as to consider it likely that there will be two rate cuts by the end of the year – which would keep pace with Australia. This is in line with the guidance that the bank reiterated last time. How strong the bank is on affirming this potential (or if they move the timeline up) would be one of the factors that could move the currency.
Lately, the NZD has been one of the stronger performers, which has been largely attributed to the central bank’s position more than any fundamental economic factors. Several analysts are pricing in weakness in the kiwi going forward. The expectation is that the reference rate will be cut along with the race to the bottom by other central banks.
A cut would once again take the reference rate to a record low. It would also be an unusual situation for the RBNZ which has traditionally kept interest rates relatively high and avoided intervention.
Incidentally, the market has a habit of wishful thinking, pricing in more rate cuts than there actually will be.
Let’s not forget that even though the inflation rate isn’t up to the target level, it did tick up a decimal on an annualized basis during the last quarter. That actually is above last year’s average, when the consensus was that the RBNZ’s next move would be a hike.
Projections Are Not Facts
A review of the justifications given by analysts for further rate cuts in New Zealand seems to be based on business sentiment, and expectations of lack of growth. However, those are not major concerns for the central bank, which, in the last statement, specified that they cared about employment and price stability.
The trend on employment appears to continue as relatively positive, with the unemployment rate at the structural level. Inflation is off, but not by a lot.
While the bank might have a vested interest in jawboning the market to support growth, that doesn’t mean they are willing to embark on an extended rate-cutting program in what is otherwise a stable economy.