Big moves expected on Wednesday
The Reserve Bank (RBNZ) is gearing up for a crucial monetary policy statement (MPS) this Wednesday, with markets bracing for a potential 180-degree shift from the central bank’s May stance.
“It’s show time! Grab your popcorn... Wednesday is going to be a massive day,” said Kiwibank’s Sabrina Delgado, Mary Jo Vergara, and Jarrod Kerr (pictured above, left to right).
Economic conditions worsen as inflation cools
New Zealand’s economy has been in a triple-dip recession, with inflation easing from 7.3% to 3.3%.
“We know inflation is cooling, and is down from 7.3% to 3.3%,” the Kiwibank team said, further forecasting reductions below 3% by the September quarter.
However, the labour market is softening, with unemployment rising to 4.6%.
Calls for immediate rate cuts
Given the economic downturn, Kiwibank’s economists recommended an aggressive series of rate cuts, starting with a 25-basis-point reduction this week.
“We recommend a cut this week, followed by a cut at every meeting until the cash rate hits 2.5%,” they stated, suggesting that RBNZ needs to act swiftly to provide economic support.
Market volatility expected on RBNZ decision
The markets have priced in significant cuts, with -19bp of cuts expected on Wednesday alone.
“Looking at current market pricing, anything less than cutting in August will cause a large spike in wholesale rates,” the Kiwibank economists said, highlighting the potential for market upheaval if RBNZ opts to hold rates steady.
Uncertain path ahead for RBNZ
Despite the case for cuts, RBNZ faces a difficult decision, balancing economic needs against maintaining credibility.
“They should [cut], but it’s still unlikely,” the Kiwibank economists said, indicating that the central bank might delay cuts until October or November, leading to further uncertainty in the markets.
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