Hawkish RBNZ Seen Unswayed By Signs of Deepening Economic Slump

Article content

(Bloomberg) — New Zealand’s central bank will likely reiterate this week that interest rates need to stay high for a sustained period, even as households hunker down amid signs of a deepening economic downturn.

The Reserve Bank will keep the Official Cash Rate at 5.5% for an eighth straight meeting Wednesday in Wellington, according to all 20 economists in a Bloomberg survey. They expect the RBNZ to continue to sound hawkish despite investors betting that rate cuts will start before the end of the year. 

Article content

“There is no doubt that the New Zealand economy is in a very weak position and it is likely to deteriorate further,” said Sean Keane, chief Asia-Pacific strategist for JB Drax Honore. “The RBNZ’s focus and mandate however is on inflation, and their wording at the meeting is likely to be disappointing for those looking for a near-term easing.”

The central bank in May projected it won’t start reducing rates until the third quarter of 2025, and said the Monetary Policy Committee even considered raising the OCR again amid persistent domestic price pressures. Data since then suggest the economy may have contracted in the three months through June, which would mean gross domestic product has declined in five of the past seven quarters.

The RBNZ will release Wednesday’s decision at 2 p.m. local time. It is a policy review rather than a full Monetary Policy Statement, so the bank won’t publish fresh economic forecasts or hold a news conference with Governor Adrian Orr.

Central banks globally are focused on how quickly inflation is slowing and when they can begin easing. The Swiss National Bank unveiled a surprise rate cut in March, the Bank of Canada followed suit in June and the US Federal Reserve is expected to start cutting before year-end. Australia’s central bank continues to signal a possible rate hike, with inflation proving stickier than anticipated.  

Article content

Article content

New Zealand’s services and manufacturing sectors are contracting, while measures of consumer and business confidence are painting an increasingly gloomy outlook. 

That has prompted investors to price the possibility of two rate cuts this year, while most economists also expect a pivot in the fourth quarter.

The RBNZ is more likely to acknowledge the case for cutting rates at its next meeting on Aug. 14, when it will have seen second-quarter inflation and labor market data, economists said.

“We think the stage is becoming increasingly set for a materially dovish pivot from the RBNZ. But a key issue, as always, is timing,” said Andrew Ticehurst, economist at Nomura Holdings in Sydney. “Our base case is that will not emerge more clearly until August.”

Nick Tuffley, chief economist of ASB Bank in Auckland, said this week’s review may be too soon to see much shift in the RBNZ’s stance, though any greater emphasis on the risks of weaker than expected medium-term inflation would be a sign it’s starting to change its tune.

“We see the balance of risks tilting quickly over the remainder of this year,” said Tuffley, who last week brought forward his forecast for the first rate cut to November. 

Article content

Whereas previously policymakers were worried about reducing rates too soon and allowing inflation to re-accelerate, now the risk was “holding monetary policy too tight for too long, unnecessarily damaging the economy and people’s employment prospects,” he said.

Still, inflation at 4% remains well above the RBNZ’s 1-3% target band and domestic price pressures, as measured by the non-tradable inflation gauge, are elevated. Though loosening, the labor market also remains relatively tight, with the jobless rate at 4.3% in the first quarter.

While recent forward-looking data have been soft, “we doubt it’s sufficient to bring about a meaningful change in policy rhetoric from the RBNZ” this week, said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland. 

For Zollner, who expects rate cuts to start early next year, the RBNZ would need to see meaningful downward surprises across a range of key data for a November pivot to come into play. 

“That’s not far-fetched, but it’s far from a fait accompli,” she said.

Article content