New Zealand economic growth just surged, but economists don't think that'll stop the RBNZ from talking about rate cuts

  • The Reserve Bank of New Zealand (RBNZ) will announce its September interest rate decision at 9am Wellington time on Thursday (7am Sydney).
  • In the June quarter, New Zealand’s economy grew by 1%, the fastest increase in two years.
  • Despite the growth spurt, many economists suggest the RBNZ will continue to indicate that official interest rates will remain at record-low levels for a considerable period yet. The RBNZ has previously warned the next move could be down, not just up. Some believe it may be even more dovish than when it last met in August.

While markets remain focused on the US Federal Reserve’s upcoming interest rate decision, there’s another central bank who’ll be in action in the early hours of Thursday morning in Asia: The Reserve Bank of New Zealand (RBNZ)

Unlike the Fed, the RBNZ won’t be raising rates, nor releasing supplementary economic forecasts, meaning all attention will be in the one-page monetary policy statement that will arrive at 7am AEST.

When the bank last met in August, it made it clear that official interest rates, in its opinion, are likely to remain at 1.75% for some time yet.

“We expect to keep the overnight cash rate (OCR) at this level through 2019 and into 2020, longer than we projected in our May Statement,” the RBNZ said.

And, as it has done in prior meetings, it failed to rule out the prospect of cutting rates again, suggesting the direction of its next OCR move “could be up or down”.

This is a starkly different mindset from other major central banks in late 2018, including that from the Reserve Bank of Australia (RBA) who continue to suggest the next move in official interest rates is likely to be higher.

However, since the RBNZ last met in early August, we’ve learnt that New Zealand economic growth surged in the June quarter, lifting by 1%, the fastest increase in two years.

Importantly, it was double the pace forecast by the RBNZ.

Will that be enough to shift the dial on interest rates on Thursday?

Jarrod Kerr, Chief Economist at Kiwibank, is sceptical that it will.

“We don’t expect this to make material change to the RBNZ current cautious stance,” he says.

“Inflation has been too low for too long and we have a central bank that is doggedly determined to lift inflation back to the middle of the 1-3% inflation target band and keep it there.

“As a result, we are sticking to our view that the next move in the OCR will be a hike in May 2020 and gradually rising thereafter.”

Kerr’s not the only one to share that view.

“We now expect the RBNZ to increase interest rates to 2% in the second half of 2021,” says Marcel Thieliant, Senior Australia and New Zealand Economist at Capital Economics. “That’s much later than the consensus of other analysts, which still foresees interest rates rising next year.”

Dominick Stephens, Economist at Westpac Bank, agrees that if there’s a risk to the tone of the September policy statement, it’s that it will be more dovish, rather than hawkish, than markets anticipate.

“[There’s a] possibility the RBNZ adopts a soft easing bias, explicitly warning that if the economy fails to accelerate as expected, the OCR could fall. This would match RBNZ comments made in the media, and would be in the spirit of open and frank communication that the RBNZ has embraced,” he says.

Stephens says its “very unlikely that the RBNZ will issue a hawkish statement that causes interest rates and the exchange rate to rise”, acknowledging the balance of risks is for lower interest rates and New Zealand dollar.

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