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RBNZ Rate Decision: When to Cut?

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The New Zealand central bank meets on Wednesday, at the tail end of the recent cycle of policy meetings in which the tone has generally been to hold on for one more month. It seems that trend will continue with the RBNZ rate  meeting as well. Economists unanimously agree that there will be no change in policy, and that the OCR will remain at 5.5%.

But, as central banks hold on to the pause button, markets are getting antsy. This will be the sixth consecutive occasion in which interest rates haven’t been changed in New Zealand. In that time, however, the country has slipped into a technical recession. Business confidence continues to fall. Pressure is mounting on the MPC to provide some relief to the economy.

It’s a Matter of Timing

The other thing that all the surveyed economists agree on is that the RBNZ will cut rates, it’s just that they disagree on when. The majority say that the first cut will be by the end of the third quarter, while the rest posit it will be later with a small number suggesting even as late as the start of the next year.

Investors hoping to get some clues for more precision on when this will happen are likely to be disappointed, since the RBNZ is only slated to issue its Monetary Policy Report. That doesn’t include updated projections for inflation and economic growth, which are seen to be crucial for a more precise forecast on when easing will start.

Always the Chance of a Surprise

We should remember that the RBNZ has been bucking market expectations in the recent past, leading to strong swings in the Kiwi. Recently, those surprises have been on the downside, and there is always the possibility that Governor Adrian Orr could provide some suprrise dovish commentary.

On the other hand, the relatively new Monetary Policy Committee (MPC) is going through a transition phase, with two board members leaving and one new member joining in the days ahead of the meeting. A further board member will rotate out two months from now. With only seven members (the Governor is permanent), effectively that’s half the MPC being changed over the course of two months. That could also have an impact on how the RBNZ understands the economic data and outlook.  But it could also mean that the bank tries to avoid shaking up the markets as they adjust to the new views of the MPC.

An Improving Situation

The current projections see inflation coming down to target by the end of the current quarter, and the market is pricing in two rate cuts by the end of the year. But in past comments, the RBNZ have suggested that rates will remain high even if lower inflation is achieved, in order to ensure that the CPI change stays at the desired level.

What could have an influence on the NZDUSD is the relative timing of the RBNZ’s first cut compared to the Fed’s expected first cut. For now, the Fed is expected to cut in June, and the RBNZ immediately after. But if the Kiwi central bank is seen delaying beyond that, it could give the currency a boost.

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