JP Morgan says the next move from the RBNZ may be to cut rates, not hike

Getty ImagesRBNZ could lower rates again.
  • The Reserve Bank of New Zealand (RBNZ) left official interest rates unchanged at 1.75% for a 20th consecutive month in June.
  • The changes in the statement were dovish, suggesting it could take even longer for the RBNZ to begin lifting rates. In May, the bank pushed the probable timing of a 25 basis point increase back to the September quarter 2019.
  • Economists at JP Morgan are forecasting the RBNZ will leave rates unchanged until the end of 2019, “with risks biased toward cuts”.

Like Australia, official interest rates in New Zealand are going nowhere fast.

That point was rammed home today following the Reserve Bank of New Zealand’s (RBNZ) June monetary policy meeting with the bank stating that the “best contribution we can make to maximising sustainable employment, and maintaining low and stable inflation, is to ensure the overnight cash rate (OCR) is at an expansionary level for a considerable period.”

Given the RBNZ’s latest forecasts, offered back in May, put the probable timing of a 25 basis point increase in the OCR in the September quarter 2019, the statement suggests it’s still in no rush to follow the likes of the US Federal Reserve, Bank of Canada and Bank of England in beginning to normalise interest rates.

Indeed, while it said the OCR will remain at 1.75% “for now,” it said that it was “well positioned to manage change in either direction — up or down — as necessary”.

And of what other tweaks were made to the short June policy statement, just 235 words long, most were dovish in nature, suggesting it may be even longer before the RBNZ begins to normalise policy settings.

On the domestic economy, it said New Zealand’s weaker-than-expected Q1 GDP result “implies marginally more spare capacity in the economy than we anticipated”.

It also added that the government’s projected spending impulse “is also slightly lower and later than anticipated”.

More broadly, it said its outlook for the New Zealand economy detailed in May remained “intact”.

“Employment is around its sustainable level and consumer price inflation remains below the 2% mid-point of our target, necessitating continued supportive monetary policy for some time to come,” the statement said.

On the international front, it said that “global economic growth is expected to support demand for our products and services”, adding that “global inflationary pressure is also expected to be higher but remain modest”.

However, it acknowledged that “this outlook has been tempered slightly by trade tensions in some major economies”. It also note that “ongoing volatility in some emerging market economies continues”.

Again, language that suggests risks to its economic forecasts are to the downside.

To Ben Jarman, Economist at JP Morgan, the changes in the June statement also suggests the risk of a rate cut, rather than hike, have increased.

“Today’s commentary consolidates the sense that, unlike the RBA, the RBNZ will keep acknowledging that rate cuts are a plausible scenario,” he says.

“We are forecasting the RBNZ to stay on hold through the end of 2019, with risks biased toward cuts.”

While he still thinks the next move in the cash rate will be higher, Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, says that’s only likely to occur in 2020 at the earliest.

“We think the markets are still too hawkish in pricing in an interest rate hike in the second half of next year,” Dales says.

“Our view that rates won’t rise until mid-2020 makes us more dovish than the RBNZ.”

The full RBNZ statement can be found here.

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