The Reserve Bank of New Zealand (RBNZ) Monetary Policy Committee (MPC) kept the Official Cash Rate (OCR) at 5.5% as expected. However, today’s statement from the Committee was more dovish than many were expecting and opens the way for at least one 0.25% OCR cut before the end of the year.
The MPC acknowledged that inflation is likely to fall to within the RBNZ’s 1-3 percent target range before the end of the year, excess capacity is emerging in the economy, and inflation expectations and business pricing pressures are easing. Although the MPC noted domestic inflation remains persistent, growing excess capacity in the domestic economy provides the MPC with greater certainty it will sustainably decline.
The acknowledgement by the Committee of emerging spare capacity and declining inflation expectations was telling as developments in these areas were flagged in a recent speech by the RBNZ Chief Economist as potential preconditions for monetary policy easing.
Today’s statement also explicitly noted two-sided risks to its inflation outlook. While the MPC recognised a risk that domestically driven inflation could be more persistent in the near term, there was also a risk that price setting behaviour and inflation expectations could normalise more rapidly as headline inflation declines.
The MPC’s statement gives us higher confidence the MPC will decide to cut the OCR by 0.25% in November at the latest. Based on today’s statement, there is an increased chance that an OCR cut may come earlier than November, possibly at the RBNZ’s October meeting. The June quarter CPI release on 17 July will be critical to the timing of the first OCR cut, with lower inflation than the RBNZ expects likely to further increase the chances of October and November cuts.
Money market moves have been substantial in the wake of the MPC’s statement with a 0.25% OCR cut now a decent chance for the RBNZ’s August meeting and a 0.25% cut fully expected by the October meeting. Markets are now expecting almost 0.50% of OCR cuts by the end of 2024. The New Zealand dollar declined significantly on the release of the MPC statement.
John Carran is Director, Investment Strategist and Economist, Wealth Research. The information and commentary in this article are provided for general information purposes only. It reflects views and research available at the time of publication, using external sources, systems and other data and information we believe to be accurate, complete and reliable at the time of preparation. We make no representation or warranty as to the accuracy, correctness and completeness of that information, and will not be liable or responsible for any error or omission. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Wealth Limited is an NZX Advisory Firm. A financial advice provider disclosure statement is available free of charge here.
The MPC indicates that future changes to the OCR would depend on its evolving assessment of the economy. In this regard, the September quarter Consumer Price Index and labour market statistics will be critical in informing its near-term OCR decisions.
Gross Domestic Product (GDP) declined 0. 2% in the June quarter, which was a smaller fall than most economists had penciled in.
In cutting the Official Cash Rate (OCR) by 0.25% to 5.25% the Reserve Bank of New Zealand (RBNZ) Monetary Policy Committee (MPC) has executed a 180 degree turn from its hawkish stance just three months ago
The deciding factor for the MPC’s OCR cut was its view that excess capacity is growing by more than expected, which is seen as pushing inflation down further than it previously thought.
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