CBA: The RNBZ is 'almost certain' to cut rates this week -- but by how much?

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This Thursday the Reserve Bank of New Zealand (RNBZ) holds its July monetary policy meeting with markets near-unilaterally in agreement that interest rates will be lowered at the conclusion of this meeting.

The only question being asked by markets is by how much the RBNZ will cut, rather than, will they cut?

According to CBA its “almost certain” that the board will reduce interest rates by 25bps to 3.00%.

Here’s the CBA.

We believe it is almost certain the RBNZ will cut interest rates by 25bpts on Thursday, bringing the cash rate to 3.00%. However, the interest rate market is currently pricing a 120% chance of a 25bpts cut; implying a 20% risk of a 50bpts interest rate cut to 2.75%. The exchange rate market has also fully priced in a 25bpts rate cut to 3.0%. Given the current market pricing, we thought it appropriate to outline how the market may react to Thursday’s RBNZ meeting, and assess three possible scenarios that may unfold.

The three scenarios are outlined below, along with CBA’s view on how the New Zealand dollar will likely react.

  1. The RBNZ cuts interest rates by 25bps and signals further easing bias.
  2. The RBNZ cuts interest rates by 25bps and provides no forward rates guidance.
  3. The RBNZ cuts interest rates by 50bps and provides no forward rates guidance.

The CBA assigns a 60% probability that the first option will come to fruition, something they believe will see a modest 0.75% decline in the NZD/USD exchange rate should it eventuate.

The second option — that the RBNZ cuts 25bps and provides no forward guidance — is seen as a 20% probability by the bank. If this scenario eventuates they believe the NZD/USD could rally by as much as 1.5% on the back of diminished expectations for further policy easing. Given the level of short positions in the Kiwi at present, this scenario could result in one almighty “short squeeze” as traders who have sold the Kiwi are prompted to cover their positions.

The third option, and certainly the juiciest for markets, is a 50bps cut and no forward guidance from the RBNZ. The CBA attach a 20% likelihood of this happening, which could see the NZD/USD fall by more than 2% in just 24 hours.

What way will the RBNZ go? That question will be answered 7am AEST Thursday.

Midway through Monday’s session the NZD/USD is currently up 0.78% at .6563. Over the past year it has fallen by 26%.

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