New Zealand Cuts Cash Rate by 50 Bps, Signals Further Easing
Tuesday, Nov 26, 2024 8:35 pm ET
5min read The Reserve Bank of New Zealand (RBNZ) has cut its official cash rate (OCR) by 50 basis points (bps) to 4.25%, signaling a continuation of its dovish monetary policy stance. This decision, announced on November 27, 2024, came as no surprise to market analysts, with 27 out of 30 economists polled by Reuters predicting a 50 bps rate reduction. The RBNZ's decision reflects its confidence in the economy's ability to converge towards the target inflation band, with inflation expectations close to target and core inflation converging to the midpoint.
The RBNZ's monetary policy committee highlighted that economic activity in New Zealand remains subdued, with business investment and consumer spending being weak. The committee also noted that the economy is in a position of excess capacity, encouraging price and wage-setting to adjust to a low-inflation economy. Lower import prices have assisted the disinflation process, contributing to the decline in annual consumer price inflation, which is now close to the midpoint of the target band.
The RBNZ's decision to front-load rate cuts is expected to boost economic activity by lowering borrowing costs for households and businesses. This move aims to stimulate consumer spending and business investment, which have been weak in recent months. Lower interest rates make saving less attractive, potentially leading households to redirect funds towards consumption.
The RBNZ's updated economic projections suggest a recovery in economic growth during 2025, supported by lower interest rates encouraging investment and spending. However, the RBNZ acknowledged that employment growth will remain weak until mid-2025, and financial stress may take time to ease.
The RBNZ's dovish stance and projections for further rate cuts are likely to fuel market expectations of lower interest rates in the near term. However, the RBNZ's emphasis on the need to respond to any shocks to inflation may temper these expectations, as investors will be watching for any signs of a change in the RBNZ's stance.
The New Zealand Dollar (NZD) is expected to face intense selling pressure following the RBNZ's decision, with sellers targeting levels unseen since November 2022 around 0.5750. The NZD could rally hard if the RBNZ surprises with a 25 bps rate cut or maintains OCR forecasts, potentially regaining 0.5900 and beyond. However, the downside risks remain intact for the NZD/USD, with the 14-day Relative Strength Index (RSI) staying vulnerable below the 50 level.
The RBNZ's decision to cut the OCR by 50 bps is expected to have significant impacts on the NZD/USD exchange rate and Kiwi bond yields. Further easing by the RBNZ is likely to put downward pressure on the NZD/USD exchange rate, as lower interest rates make New Zealand assets less attractive to foreign investors. This could lead to capital outflows, driving the NZD/USD lower. Kiwi bond yields may also decline, as investors seek higher returns in other markets, leading to a sell-off in New Zealand government bonds.
The RBNZ's updated economic projections are likely to influence market expectations for future rate movements. The RBNZ's OCR forecasts for this year and the next are fully priced in by markets, with the OCR projected to be at 4.92% in Q4 2024. This implies a potential downward revision to the OCR forecasts, which could reaffirm dovish expectations and fuel market anticipation of lower interest rates in the near term.
In conclusion, the RBNZ's decision to cut the OCR by 50 bps reflects its confidence in the economy's ability to converge towards the target inflation band. The RBNZ's dovish stance and projections for further rate cuts are likely to influence the NZD/USD exchange rate and Kiwi bond yields, as well as market expectations for future rate movements. The RBNZ's emphasis on responding to any shocks to inflation may temper market expectations, as investors will be watching for any signs of a change in the RBNZ's stance.
The RBNZ's monetary policy committee highlighted that economic activity in New Zealand remains subdued, with business investment and consumer spending being weak. The committee also noted that the economy is in a position of excess capacity, encouraging price and wage-setting to adjust to a low-inflation economy. Lower import prices have assisted the disinflation process, contributing to the decline in annual consumer price inflation, which is now close to the midpoint of the target band.
The RBNZ's decision to front-load rate cuts is expected to boost economic activity by lowering borrowing costs for households and businesses. This move aims to stimulate consumer spending and business investment, which have been weak in recent months. Lower interest rates make saving less attractive, potentially leading households to redirect funds towards consumption.
The RBNZ's updated economic projections suggest a recovery in economic growth during 2025, supported by lower interest rates encouraging investment and spending. However, the RBNZ acknowledged that employment growth will remain weak until mid-2025, and financial stress may take time to ease.
The RBNZ's dovish stance and projections for further rate cuts are likely to fuel market expectations of lower interest rates in the near term. However, the RBNZ's emphasis on the need to respond to any shocks to inflation may temper these expectations, as investors will be watching for any signs of a change in the RBNZ's stance.
The New Zealand Dollar (NZD) is expected to face intense selling pressure following the RBNZ's decision, with sellers targeting levels unseen since November 2022 around 0.5750. The NZD could rally hard if the RBNZ surprises with a 25 bps rate cut or maintains OCR forecasts, potentially regaining 0.5900 and beyond. However, the downside risks remain intact for the NZD/USD, with the 14-day Relative Strength Index (RSI) staying vulnerable below the 50 level.
The RBNZ's decision to cut the OCR by 50 bps is expected to have significant impacts on the NZD/USD exchange rate and Kiwi bond yields. Further easing by the RBNZ is likely to put downward pressure on the NZD/USD exchange rate, as lower interest rates make New Zealand assets less attractive to foreign investors. This could lead to capital outflows, driving the NZD/USD lower. Kiwi bond yields may also decline, as investors seek higher returns in other markets, leading to a sell-off in New Zealand government bonds.
The RBNZ's updated economic projections are likely to influence market expectations for future rate movements. The RBNZ's OCR forecasts for this year and the next are fully priced in by markets, with the OCR projected to be at 4.92% in Q4 2024. This implies a potential downward revision to the OCR forecasts, which could reaffirm dovish expectations and fuel market anticipation of lower interest rates in the near term.
In conclusion, the RBNZ's decision to cut the OCR by 50 bps reflects its confidence in the economy's ability to converge towards the target inflation band. The RBNZ's dovish stance and projections for further rate cuts are likely to influence the NZD/USD exchange rate and Kiwi bond yields, as well as market expectations for future rate movements. The RBNZ's emphasis on responding to any shocks to inflation may temper market expectations, as investors will be watching for any signs of a change in the RBNZ's stance.
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