New Zealand Poised to Cut Rates Below 1% in ‘Nail Biter’ Decision

(Bloomberg) --

New Zealand’s central bank may cut interest rates to a fresh record low as it seeks to boost economic growth and revive inflation, although its final review of the year is proving hard to predict.

Sixteen of 21 economists in a Bloomberg survey expect the Reserve Bank to cut the official cash rate by 25 basis points to 0.75% on Wednesday, with five seeing no change. Investors increased bets on a cut after a report on Tuesday showed a further decline in inflation expectations, a key metric for the RBNZ.

The bank’s policy makers must weigh recent signs of stabilization in both the domestic and global economies against their concern that growth is too weak to get inflation back to the middle of the 1-3% target. Having shown a willingness to act sooner rather than later, the monetary policy committee is, on balance, considered more likely to pull the trigger than hold fire.

“So far, the strategy seems to be ‘we haven’t got many bullets, let’s use them proactively’,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “We’re assuming that strategy will continue. The Reserve Bank needs the economy to pick up in order to confidently and credibly predict inflation at the mid-point of the target over the medium term.”

The central bank announces its decision at 2 p.m. local time tomorrow, when it will also publish updated economic forecasts. Governor Adrian Orr gives a press conference an hour later. Traders are now pricing a 76% chance of a cut, up from 60% yesterday, according to swaps data.

The RBNZ has delivered 75 basis points of easing this year, including a surprise 50-point cut in August. At its last rate review in September, it said there was scope for further stimulus “if necessary.” Since then, some economic data have raised doubts about whether another rate cut is needed.

Inflation slowed less than expected to 1.5% in the third quarter as domestic prices rose at the fastest pace since 2011. Business confidence last month climbed from an 11-year low, and there are signs of life in the housing market. The New Zealand dollar has also weakened considerably this year, boosting import prices and reducing downward pressure on inflation.

‘Quite Concerning’

Westpac New Zealand economists cited these developments as well as improving global sentiment last month when they switched their RBNZ rate forecast for November from a cut to a hold. However, they reverted to a cut forecast today after an RBNZ survey showed two-year ahead inflation expectations dropped to 1.8%, a fresh three-year low.

“Our suspicion was that the survey would rebound, as the data are often volatile quarter to quarter,” said chief economist Dominick Stephens. “The fact that expectations actually fell further will be quite concerning to the Reserve Bank, increasing the chance that they will cut the OCR tomorrow.” The decision is still a “nail biter,” he said.

The labor market may be another area of concern for the central bank. A report last week showed the jobless rate rose to 4.2% in the third quarter, while annual employment growth was the slowest since 2013. Under its dual mandate, the RBNZ must support maximum sustainable employment as well as maintain price stability.

“The labor market is likely to cool further,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “Firms’ hiring intentions are tracking well below averages, and economic growth is likely to slow further.”

The economy expanded 2.1% in the year through June, down from 3.2% a year earlier. The RBNZ in August predicted a pick up to 3% by mid-2020, which now looks optimistic. It needs growth to exceed 2.7% for the economy to generate faster inflation, Deputy Governor Geoff Bascand said in August.

“They’re going to have to revise down their near-term growth forecasts a lot, and we think that will trump everything else,” said Zollner.

--With assistance from Tomoko Sato.

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Tracy Withers, Malcolm Scott

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