- The RBNZ has surprised financial markets, flagging it may cut official interest rates in the months ahead.
- Previously, the bank saw rates increasing in early 2021.
- It cited a weaker global economic outlook and recent strength in the New Zealand dollar as two factors behind the change in policy stance.
- The dovish shift follows similar moves from other major banks, including the RBA and US Fed, in recent months.
- The New Zealand dollar has fallen sharply on the news.
Following in the footsteps of other major central banks in recent months, the Reserve Bank of New Zealand (RBNZ) delivered a dovish surprise at its March monetary policy meeting, flagging the potential for a further reduction in its cash rate in the months to come.
“Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next overnight cash rate (OCR) move is down,” the RBNZ said.
“We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.”
On the global economy, the RBNZ said “the outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China”.
It acknowledged the role of other central banks in its adoption of an easing bias, implying that rates could be cut again, noting the weaker global outlook had “prompted central banks to ease their expected monetary policy stances”.
In turn, it said this had placed “upward pressure on the New Zealand dollar”.
For a central bank trying to muster inflationary pressures, this was seen as a negative development in trying to achieve this task.
“Employment is near its maximum sustainable level,” it said, referring to the first of its twin policy mandates for official policy settings.
“However, core consumer price inflation remains below our 2% target mid-point, necessitating continued supportive monetary policy.”
The RBNZ sectoral factor inflation model, its preferred measure of underlying inflationary pressures, grew by 1.7% in the year to December, unchanged from the pace recorded in the prior quarter and below the midpoint of its 1-3% target.
The bank said it still expects inflation to lift to around the mid-point although it admitted the balance of risks had “shift to the downside”.
While the RBNZ may now cut rates in the months ahead to help boost inflation and mitigate potential global risks, it still retained an optimistic assessment on the broader domestic economic outlook.
“We expect ongoing low interest rates, and increased government spending and investment, to support economic growth over 2019,” it said.
“Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure, housing, and transfer payments also supports domestic demand.”
However, keeping with the dovish commentary throughout the March statement, it warned the “risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending”.
As for upside risks, it said “inflation could rise faster if firms pass on cost increases to prices to a greater extent”.
Previously, the RBNZ forecast that New Zealand’s cash rate was likely to increase in early 2021. It currently sits at 1.75%, a level it has remained since late 2016.
With the bank now flagging that the next move in rates is likely to be lower, it has seen the New Zealand dollar plummet against the Australian and New Zealand dollars, as well as the major crosses.
That suggests the dovish shift from the bank was not expected by financial markets, even with similar moves from major central banks, including the RBA, since the beginning of the year.
“We were very surprised by this change of stance, because the economic situation has not changed much since the RBNZ’s last missive in February,” said Dominick Stephens, Chief Economist at Westpac Bank in New Zealand.
“Perhaps the main reason for the change of stance was the actions of other central banks.”
As for whether or not the RBNZ will act upon its easing bias, some economists believe it could cut rates as soon as May this year.
“RBNZ rate cuts are now much more likely than not,” said Jeremy Couchman, Senior Economist at Kiwibank.
“In an immediate change of call, we place a rate cut in May with a 60% chance. One cut wouldn’t touch the sides, so we expect another follow up move to 1.25% in either August or November.”
Marcel Thieliant, Senior Economist at Capital Economics, is another who believes that a May move appears likely.
“Given the Bank’s dovish tilt today, it now looks more likely than not that the Bank will indeed start to loosen policy before long, perhaps as soon as May,” he said.
“Financial markets are currently pricing in about a 60% chance of a 25 basis point rate cut over the coming year.”
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