MNI RBNZ WATCH: MPC To Consider 75bp Cut, 50bp Most Likely

MNI (SYDNEY) - The Reserve Bank of New Zealand will probably cut its 4.75% Official Cash Rate 50 basis points when it meets next Wednesday but it is likely to consider a 75bp reduction given the lengthy wait until its next meeting in 2025 and continued economic softening. 

Inflation has continued to moderate at a slightly faster pace than the RBNZ had expected when it published its last set of forecasts in August. While unemployment did not rise as much as expected in Q3, it has largely tracked the RBNZ's outlook. A range of other metrics, such as job ads, business and consumer confidence measures, have failed to rebound substantially following the RBNZ’s cumulative 75bp of easing since August. (See MNI RBNZ WATCH: MPC Cuts 50bp, Further Moves Depend On Data) 

Overnight index swaps have priced in a 4.19% OCR next Wednesday and a 16% chance of a 75bp cut. The Australian dollar, meanwhile, strengthened to it highest level against the kiwi in Friday afternoon trading since October 2022 at NZD1.11. Markets now expect the OCR to be 52bp lower than Australia’s 4.35% cash rate by July. 

INFLATION FALLS, LABOUR WEAK

The RBNZ in its August forecasts had expected CPI at 2.3% by December. Inflation in Q3 fell to 2.2% y/y, largely due to lower tradables inflation, from Q2's 3.3%. The Bank will likely point to still elevated domestically-driven, non-tradables inflation – which landed at 1.3% q/q in Q3 – within its communications as an area of concern. 

Unemployment tracked largely in line with expectations at 4.8% in Q3, while employment growth and labour costs were weaker than expected, illustrating the easing of labour market pressure on inflation. While weaker, the Q3 results pointed to a fairly resilient labour force despite some market economists' more pessimistic predictions when the RBNZ first shifted its stance to rapid easing in August.

UPDATED FORECASTS

The RBNZ will also publish its Monetary Policy Statement with forecasts that are likely to show a further downward revision to CPI. However, the Reserve will probably hold off from more significant changes to its GDP outlook until it receives further data, following Q2's 0.2% fall. Stats NZ will publish updated GDP figures Dec 19. 

It may also resist making significant adjustments to its OCR assumptions or neutral rate outlook until it has a clearer picture of 2025's global economy and New Zealand's fiscal stance. 

The RBNZ set its neutral rate outlook to about 3.8% within its August forecasts and had the OCR at that level by Q4 2025, with a 3% terminal rate by Q2 2027.

The statement and the MPC's post decision communications is set to highlight uncertainty regarding the international economy following Donald Trump’s re-election, the spectre of his potential trade policies, and their impact on global inflation levels. 

The MPC will not meet again until February 2025.