RBNZ Rate Decision: Are We Sure It’s A Cut?
New Zealand’s central bank is the first to wade into the choppy waters of the financial world after last week’s “flash crash”. Although markets have largely stabilized since then, there has been a general shift in the bias towards expecting less growth in the economy. This, in turn, has translated to a stronger bias in favor of easing.
But that doesn’t mean that central banks have changed their view. Mostly, policymakers don’t care about what happens in the stock market, and will be looking at macro economic data. This can lead to there being, once again, a large difference between market expectations and what the central bank will actually do. Once again, we could see the markets getting a dose of reality as the RBNZ Rate Decision doesn’t meet expectations.
What’s Expected…
Last time around, the RBNZ provided a “pivot” from its prior position that rate hikes were more likely than cuts, to say that the time for cutting might be near. Since then, markets have been pricing more and more easing as Kiwi economic data has continued to underperform. The thing is, though, that data has largely been in line with the RBNZ’s forecasts, not necessarily the markets.
The RBNZ Rate Decision’s latest projections don’t see a rate cut this year. In fact, it doesn’t expect rate cuts until the second half of next year. So, even if the RBNZ’s outlook is off, and it ends up cutting six or even nine months ahead of its own schedule, it’s still not time to ease. This leaves a large gap with the market, which overwhelmingly expects a rate cut at tonight’s meeting.
…and What Could Happen
Economists have a different view than the market, and generally agree with the central bank that the time for easing hasn’t arrived just yet. They point to the components of the latest CPI report, which showed inflation coming down to 3.3% from 4.0% in the prior quarter. That’s still outside of the RBNZ’s 1-3% target band, but more importantly non-tradable inflation was above expectations.
This has led economists to suggest that the RBNZ could opt to hold rates steady now, at least until the Fed cuts, and potentially “backfill” by cutting more aggressively in October. A way to split the difference would be to actually cut rates, but provide a very hawkish tone. Both options would likely shock the markets, which has been weakening the Kiwi currency in anticipation of a full-on cut, and expecting even more easing later in the year.
Decisions, Decisions, Who Knows?
The New Zealand Institute of Economic Research (NZIER)’s shadow board of analysts which are meant to anticipate what the RBNZ will do illustrates the uncertainty of the situation. The board isn’t affiliated with the central bank, but rather intends to poll the view of experts about what action the RBNZ should take given the current circumstances. And that they are divided on the result, with a small majority suggesting a cut.
In the end, the rate decision could come down to a relatively narrow decision by the RBNZ. In that case, even if there is a cut, markets will rely heavily on just how hawkish the accompanying monetary policy statement is. Unless it is quite dovish, markets might end up being disappointed, which could support the Kiwi dollar against its peers.
