RBNZ softens tune

Rate cuts expected this year

RBNZ softens tune

The Reserve Bank (RBNZ) has subtly softened its language in the July Monetary Policy Review, leaving the cash rate unchanged at 5.5% – a move that has increased market confidence in a rate cut later this year, according to Kiwibank economists.

“The downside risks to growth and inflation were acknowledged and emphasised,” Kiwibank's Jarrod Kerr, Mary Jo Vergara, and Sabrina Delgado (pictured above, from left to right) said.

This marks a shift from RBNZ’s May forecast, which predicted no cuts until the end of next year.

Inflation expectations adjusted

RBNZ now expects inflation to return within its 1-3% target range over the second half of 2024.

Kiwibank’s forecast of 2.9% in the September quarter suggests that inflation may fall below 3% sooner than anticipated.

“It doesn’t sound like much, but it opens up the door to rate cuts this year,” the Kiwibank economists said.

Business confidence and economic indicators

RBNZ’s softer tone reflects declining business and household confidence. “The collapse in business confidence, and the gallows level of confidence amongst households” were significant factors.

The review highlighted that labour supply increases and investment intentions have shifted, with firms now considering decreasing headcount.

Market reactions

The market has responded to RBNZ’s dovish tilt with increased volatility. Wholesale interest rate markets have priced in a full 60 basis point cut for November.

“The market now has a full 60bp rate cut priced in for November, 4.89%, down from 5.13% before today’s announcement,” the Kiwibank economists said.

Future outlook

The September quarter inflation print will be a decisive factor for a November rate cut.

“We currently expect inflation to break below 3% by Q3,” the Kiwibank economists said.

Additionally, the June quarter labour market data will play a crucial role in shaping the RBNZ's decisions.

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