Market Analysis

Actual likelihood Rate cuts by the central bank of New Zealand will begin this week

Amos Simanungkalit · 12 Aug8.6K Views

New Zealand's central bank may reduce interest rates on Wednesday, a full year ahead of its previous forward guidance, due to slowing inflation, rising unemployment, and weak economic growth, leading markets to anticipate a potential easing.

A recent Reuters poll of 31 analysts found that while 19 expect the Reserve Bank of New Zealand (RBNZ) to maintain the cash rate at 5.5%, 12 predict a 25 basis point cut, with many acknowledging the central bank faces a close decision.

Market bets on a rate cut have risen to 76%, particularly after the central bank's survey on Thursday revealed inflation expectations dropped to their lowest level in three years.

The RBNZ, which was among the first central banks to roll back pandemic-related monetary stimulus, has kept the cash rate at 5.5% since May 2023 to combat historically high inflation.

The possibility of the Reserve Bank cutting rates at its Wednesday meeting contrasts sharply with its May forward guidance, which suggested lower borrowing costs were unlikely before mid-2025.

"The New Zealand economy is contracting, spare capacity is increasing rapidly, and unemployment is still far from its peak. This is reducing inflationary pressures, and crucially, lower wage growth will help bring down persistent non-tradables inflation," said Stephen Toplis, head of research at Bank of New Zealand, in a note.

"We believe all conditions are met for the Reserve Bank to lower its cash rate now," he added.

Even if the bank decides to hold interest rates steady, many analysts expect its forecasts to be adjusted. Almost all the economists surveyed by Reuters expect rate cuts this year, with the majority predicting the cash rate will drop to 5.0% by the year's end.

Westpac industry economist Paul Clark noted that while he expects the central bank to maintain the cash rate at 5.5%, it is likely to signal potential rate cuts later this year and make significant downward adjustments to the cash rate projections for 2025.