The RBNZ faces a finely balanced decision this week, with domestic data offering both positive and negative surprises since September’s decision to keep the Overnight Cash Rate unchanged.
International conditions are similarly mixed. US growth in Q3 was supported by strong consumption despite a sharp investment slowdown, while the RBA remains confident in a “gentle turning point” in the Australian economy.
On the whole, global investor risk appetite has improved due to hopes of an improvement in the US-China trade war, which has moderated expectations for further easing from G10 central banks.
The RBNZ will have to weigh if further easing is warranted by these developments in light of two additional factors: firstly, despite some moderation of expectations in recent weeks, markets are still expecting a rate cut, and leaving rates unchanged risks causing tightening in financial conditions.
Secondly, the next scheduled policy meeting will not be until February. In light of the RBNZ’s limited ammunition and previous desire to maximise the impact of easing by surprising to the upside, we believe Wednesday will see another 25 basis point cut, with the risks tilted to mild NZD weakness in the short run as a result.
- The RBNZ’s near term growth forecasts are likely to be downgraded, with the September Monetary Policy Report’s forecasts for 0.6% and 0.7% growth in Q3 and Q4 respectively looking optimistic in light of weak survey data. Similarly, the significant downgrades to global growth by the IMF suggest that changes to important external factors such as commodity prices, export volumes and tradeable inflation will be negative.
- October’s RBNZ credit conditions survey showed expected credit availability to corporates and institutions falling sharply. Combined with the risk of NZD appreciation and a hawkish response in fixed income markets in the event of a hold, the RBNZ may consider cutting rates in order to avoid inadvertent tightening of financial conditions.
- Global investor risk appetite has improved markedly in recent weeks with the improved tone of US-China trade talks, lifting NZ fixed income yields in general and introducing at least some uncertainty into market pricing of this week’s meeting. OIS pricing implies a roughly 65% probability of a rate cut on Wednesday, down from 100% in October. Similarly, OIS forwards are reflecting a shallower cutting cycle from the RBNZ compared to October. This lowers the bar for NZD weakness in the event of a cut accompanied by dovish guidance this week.
- A 50bp cut, while unlikely, cannot be ruled out given the RBNZ’s own previous preference for over-delivering.
Author: Ranko Berich, Head of FX Market Analyst at Monex Europe.