Following in the footsteps of the Reserve Bank of Australia, the Reserve Bank of New Zealand cut interest rates to a record-low level of just 2% earlier today.
Alongside the rate cut — entirely expected by markets — the bank delivered an explicit easing bias, indicating that another rate cut is likely, talked down financial risks in the residential housing market, lowered its forecast track for interest rates and reiterated the need for a lower New Zealand dollar.
It wasn’t enough for markets, sending New Zealand bond yields higher and the Kiwi hurtling to a fresh one-year high against the US dollar.
Investors wanted more. More aggressive forecast downgrades. More aggressive language in the accompanying monetary policy statement.
To Jarrod Kerr, senior interest rate strategist at the Commonwealth Bank, the “market was overpriced and left under-delivered” by what the RBNZ dished up — tough crowd to please, right!
While financial markets are now fully priced for another 25 basis point cut to be delivered by November this year, taking the cash rate to a new record low of 1.75% (fitting with the 90-day bank bill forecasts offered by the RBNZ in its August monetary policy statement), Kerr believes that there’s likely to be at least two further rate cuts, maybe more, before the RBNZ’s easing cycle is complete.
Central banks are “reluctant cutters” as they head towards lower bounds. Frustrations over currency strength and inflation expectations eventually overpower policymakers. Because it is a global theme. And a theme the RBNZ cannot escape. Over the last 2 years, the RBNZ’s downside scenarios have quickly become central scenarios.
The weak inflation backdrop, globally, suggests inflation expectations may drift lower as inflation outcomes remain below band. Phillips curves are flat globally, with wages unresponsive. The inflation dragon has been slain.
Kerr points to the chart below to demonstrate the evolution in the RBNZ’s rate forecasts. From rate hikes to steady rates to falling rates, it’s been one downgrade from the RBNZ after another over the past two years, followed up by subsequent rate cuts.
Given that track record, and the still elevated level of the New Zealand dollar, Kerr suggests that the risks now are that rates go significantly lower.
“A RBNZ cut to 2% in August has been our view since last year. A RBNZ cut to 1.5% has been our view since March. Our forecasts for Kiwi swaps are in review,” he says.
“We now recommend trade positions to benefit from a potential RBNZ move to 1.0%.”
One percent. That’s low but certainly not fanciful, particularly given the trend of recent years.