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Cash Rate Cut: What’s Next for the Market?
In positive news for businesses and consumers, the Reserve Bank has cut the Official Cash Rate to 4.75%, down by 50 basis points.
In a media release published earlier this month, the RBNZ committee agreed to the cut and rationalised that annual consumer price inflation is within the committee’s 1 to 3 per cent inflation target range.
Additionally, it made note of the ‘subdued’ economic activity in New Zealand, citing the declining business investment, consumer spending, and employment as factors in its decision.
“Business investment and consumer spending have been weak, and employment conditions continue to soften. Low productivity growth is also constraining activity.”
In the minutes following the release, the New Zealand dollar fell from US61.30c to US61.07c, the lowest since August 2019. Additionally, the two-year swap rates declined by 7 basis points to 3.605%, implying a market forecast that there might be a further easing of 45 basis points in the RBNZ's November meeting.
The NZX50 stock market also rose on the news.
An expected move
The cash rate cut was widely anticipated as the economy has slowed from its peak post-COVID period. New Zealand’s annual inflation has eased in the last few months, with recent data keeping it steady at 3.3% in the second quarter.
As such, market expectations were somewhat firm, and the RBNZ didn’t disappoint in its move.
"The [Monetary Policy] Committee discussed the respective benefits of a 25-basis point versus a 50-basis point cut in the [official cash rate]," according to the RBNZ.
"They agreed that a 50-basis point cut at this time is most consistent with the Committee’s mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate,”
"The Committee noted that current short-term market pricing is consistent with this decision."
Are more rate cuts forecasted?
Economists' sentiment remains that the OCR will continue to see cuts for businesses and consumers. Capital Economics economist Abhijit Surya forecasted "a couple more" 50 basis point cuts in the next few months.
"We think it will end up cutting rates more aggressively than most are predicting," he said.
ANZ chief economist Sharon Zollner said that while the RBNZ will determine the next cash rate move based on market data, all signs point to further reductions in November.
"There was nothing in today’s commentary to dissuade the market from continuing to price a follow-up 50 basis point cut in November as the likeliest outcome."
Citi economists agree with these sentiments and are now forecasting an even bigger 75 basis points cut next month – an increase from their earlier prediction of 50 basis points. Given the large policy review gap between November and February next year, they mentioned that there was little need for the cash rate to be "so restrictive."
In its statement, the RBNZ remains tight-lipped on future rate cuts, stating that any changes to the OCR “would depend on its evolving assessment of the economy”.
A turnaround decision by the RBNZ
The easing of the OCR is undoubtedly a welcomed decision. However, economists cite it as a “flip-flop,” noting the significant tone change from the Reserve Bank earlier this year.
In a statement to The Business, ANZ New Zealand’s Chief Economist, Sharon Zollner, said that this ruling “was definitely a flip-flop between May and August,"
The Reserve Bank had discussed a possible increase in the OCR in May 2024. Zollner said that these earlier statements left economists and market stakeholders ‘startled’, as it implied a higher chance of a rate increase. However, there has since been a change in the RBNZ’s tone in July.
"Certainly, we'd be more inclined to say that May was the mistake rather than the first cut in August."
The New Zealand economy, which remained subdued in the second quarter, is expected to remain so over the short term. This is assessed as the country records weak house price growth and lower levels of migration.
According to Zollner, the next quarterly growth figures, such as unemployment, must remain monitored, warning New Zealand will face a recession if they continue to be negative.
“We've got some fiscal consolidation going on and quite a number of job losses in the core public service at the moment, which hasn't really shown up in the numbers just yet,”
"I think there's a very widespread expectation that unemployment is going to rise again and will likely continue to do so for some time yet, given it lags the real economy."
Key takeaway
While the OCR cut is expected to lessen the burden for many businesses and stimulate consumer spending, staying vigilant and informed is still key. Companies should leverage every opportunity to reduce risk and secure their businesses in an uncertain market.
Bonded NZ helps businesses remain efficient in economic uncertainties through comprehensive and tailored business insurance. Whether it's public liability or professional indemnity insurance, our cost-effective options help them secure their business at every angle.
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