New Zealand's Long Monetary Pause: Why RBNZ May Need Extra Rate Insurance

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New Zealand's central bank faces increased pressure to ease monetary policy aggressively this month, as a longer-than-usual three-month gap until its next rate-setting meeting calls for extra protection against a potential economic downturn.

This unusual scheduling leaves room for a larger-than-average cut, with markets and analysts widely anticipating a 50-basis-point cut at the Reserve Bank of New Zealand’s (RBNZ) final meeting of the year on November 27. Some experts even suggest a 75-basis-point cut is within the realm of possibility.

“A front-loaded rate cut provides RBNZ with a more neutral policy position going into the holiday season,” remarked Faraz Syed, a senior economist at Citi Australia, advocating for the larger move in November. “It’s what the economy currently needs.”

Since 2016, the RBNZ has held seven policy meetings per year, reduced from eight, creating a longer-than-usual holiday gap for a central bank. Former RBNZ official Michael Reddell noted that the decision to cut meetings was made when rate adjustments were rare, reducing the impact of fewer meetings. However, he believes the RBNZ might reconsider the eight-meeting structure in today’s economic climate.

Last week, the RBNZ warned of further economic strain, noting that increased unemployment could lead to more mortgage defaults over the coming months, despite recent rate cuts totaling 75 basis points.

After lifting rates by 525 basis points since 2021 to a 16-year high of 5.5% in response to inflation, which peaked at 7.3% before falling to 2.2% in Q3 2024, the New Zealand economy has suffered. GDP per capita has dropped for seven straight quarters, reflecting a decline in living standards.

The RBNZ’s next meeting won’t occur until February 19, by which time the economic landscape could shift significantly, especially with uncertainties around U.S. policies following Donald Trump's inauguration. Expectations for global inflation, driven by Trump's proposed tariffs, have already led to higher borrowing costs worldwide. In New Zealand, short-term swap rates rose 19 basis points last week, akin to a 25-basis-point official rate increase. Such pressures make a strong case for more substantial RBNZ easing measures.

"The extended holiday gap complicates things. It’s about 12 weeks between meetings instead of the usual six to seven," said Zoe Wallis, an investment strategist at Forsyth Barr.

With unemployment climbing to a near four-year high of 4.8% and a lack of job vacancies leading young workers to exit the workforce, economists see a strong case for rate cuts. Goldman Sachs supports a potential 75-basis-point cut, given rates remain high above the 3% neutral rate, the lengthy policy lag, and the holiday gap.

However, it still expects a 50-basis-point cut in November, followed by another 50 in February. Governor Adrian Orr, who recently expressed moderate concerns over inflation, signaled that while rate hikes were sharp, cuts would likely be more gradual.

 

 

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters"all rights reserved by the original author.