Another week, another round of Trump tariffs. Last week, US President Donald Trump announced a 25% tariff on all steel and aluminium imports into the US. As the world’s largest importer of steel, the inflationary implications are worrisome. The intention may be to protect US manufacturers, but the practice will likely see US consumers paying more for products dependant on the metals. Reciprocal tariffs are also on the trade agenda. During his election campaign, Trump promised “an eye for an eye, a tariff for a tariff”. And now, officials are tasked to game plan. It seems that no one is safe – whether ally to the US or competitor. However, the policy would arguably have the greatest impact on emerging markets. Countries such as India and Thailand tend to have the highest tariffs in place to help foster and protect domestic production.

This week, our focus shifts to the central banks of the Southern Hemisphere, with both the RBA and RBNZ taking centre stage. First, we turn to our neighbours down under, where market expectations are high for the RBA to commence its rate-cutting cycle. Following Australia's inflation slowdown in December to 2.4% (well within the RBA's 2-3% target band) and significant cooling in core inflation measures, markets are pricing in an 86% probability of a 25bps rate cut tomorrow. While there’s a compelling case for the RBA to deliver a rate cut, there’s still an argument for holding steady, with ongoing strength in the economy, particularly within the labour market. The relative strength of Australia’s labour market contrasts with our own softening in labour demand, and helps explain why many work-ready Kiwi are crossing the ditch. Given the labour market strength in Australia, tomorrow’s decision by the RBA is no done deal. And will certainly have us and markets on the edge of our seats.

What is a done deal, is the RBNZ’s decision on Wednesday. As we’ve said, even well before their November meeting, we’re expecting another 50bps cut. And the RBNZ has lined it up beautifully. Governor Adrian Orr said as much. And that's as close to a done deal as you get. It was uncharacteristic to receive such a clear verbal signal. Nonetheless the signal was supported by several members of the Monetary Policy Committee. So 50bps it is.

But 50bps is not our focus. The focus instead will be on the projected OCR track, and all the forecast changes that go into it. There’s a good chance the OCR track is left unchanged… frustrating market traders, and us. And there’s an even better chance the OCR track is lowered a little more… reflecting the weakness in the data. A lower track would appease market traders and economists like us. Because the November track just doesn’t cut it (literally).

The RBNZ’s current trajectory is unlikely, in our view. Why cut to 3.5%, and then wait (an eternity in markets) to cut to 3% two years later? We argue the case not to muck around. Cut to 3%, a neutral setting, and be on the watch to move into stimulatory territory if the trade wars bite us. Get to neutral and get the economy moving. Cut to 3% and hopefully wait it out for a full recovery. Ultimately, it’s better to act swiftly and decisively (not wait for two years) to be in a position to hike again in two years time. A rate hike would come when the economy has fully recovered... and you want to make sure it doesn’t reheat too much (again). We can’t wait to call for hikes. We’d love to see the economy in that position. But sadly, it’s not. Not even close. More meaningful cuts are required here and now.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, a cacophony of factors throws NZ rate markets around

“A real cacophony of factors throwing NZ rate markets around last week. Uncertainty on rate direction remains high, both domestically and offshore. US rate cut expectations ranging from -25bp to -40bp last week, finishing on the lower side (vs -120bp here in NZ). The NZ market reacted to global moves on stronger monthly US CPI, but the move higher in yields was quickly received into as they approached recent highs. The upward momentum was given support domestically via the large NZGB2035 syndication, seeing buyers wanting to hedge their interest rate exposure via paying swap. This largely isolated to the 10-year point. End of day interest rate closes don’t show the true volatility currently evident, a reflection of the high degree of uncertainty on global trade and a wide array of domestic terminal OCR expectations (2.75-3.50%).

This week the RBNZ hold court. A -50bp widely expected. The OCR track will be shunted forward, that needs to happen to clear up the messy track portrayed in November. The end point should be left around the 3.00% level unless the RBNZ is really worried about the mix of recent data. The general direction will continue to be lower for the OCR, however the speed and end point are large swing factors. The RBNZ need mortgage holders to continue to fix at lower levels, so some time is needed. The RBNZ surely weary of lurching too far given their stability mandate. As a result, recent ranges should hold the likes of the benchmark 2 year in a 3.35-3.60% range. Nerves will be heightened this week, 3 months since we’ve heard from the RBNZ a real mix of data outturns (strong PMI vs low inflations expectations last week) all point to caution. That caution magnified tenfold by the 80% of mortgages on less than 1-year terms. That’s quite some flow for the Kiwi rates market, and upside to rates, if the RBNZ were to call time on rate cuts.” Ross Weston, Head of Balance Sheet – Treasury.

In currencies, the RBNZ is this week’s focus for the Kiwi

“This week we get a break from the focus on geopolitics and tariffs, with the RBNZ’s first MPS of the year. On Wednesday the market is expecting a 50bp cut from the RBNZ. Unusually, this is seen as pretty much a given, with RBNZ Governor, Adrian Orr, being quite explicit at the November MPS, that we would likely see a 50bp cut in February. The data also backs a cut of this magnitude, with CPI tracking lower, inflation expectations lower, and GDP and employment continuing to suffer under the current restrictive policy settings. Outside of the cut itself, the market will be laser focused on the RBNZ’s OCR track, which was a cause of some confusion at the last MPS. After opening last week at 0.5663, the Kiwi traded close to support around this level for the week, but did have a brief dip to 0.5606. US Dollar weakness into the end of the week saw the Kiwi climb to a high of 0.5737 on Friday, as the reality around the administration and negotiation of reciprocal tariffs put a dampener on the bullish US Dollar views that have marked the kick off of Trump 2.0. We expect that tariffs will still be a focus for the market this week, but we have plenty to view closer to home. Also this week we have the RBA making a rate decision on Tuesday. The market is expecting a 25bp cut, but this is certainly not a given, with the RBA being a more hawkish central bank when it comes to the threat of inflation. NZDAUD traded sub 0.9000 (0.8980/0.8990) for most of last week and on Friday managed to trade to a high of 0.9024, as the Kiwi dollar outperformed the Aussie against a falling US Dollar. A cut from the RBA tomorrow will likely see NZDAUD trade higher, perhaps closer to 0.9100, but the effect should be dampened by the expectations of a larger cut from the RBNZ the next day. For the NZDUSD, the delivery of a cut from the RBNZ is already priced in, so should see limited downside for the Kiwi. Otherwise, our more medium-term view, is that the Kiwi has limited upside potential in the current environment.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Here at home, the RBA is set to deliver a 50bps cut at the February Monetary Policy Statement. For market participants, the OCR track will be of greater interest. The track currently has 75bps of cuts pencilled in by year-end. Given growing excess capacity, there's enough evidence to justify lowering the track and delivering more rate cuts in 2025. A fresh set of economic forecasts will also be delivered, set against a backdrop of heightened global uncertainty (Trump tariffs etc).
• Before the RBNZ meeting, the RBA will announce their first rate decision for the year. The RBA is likely to begin its easing cycle, following its central bank peers. The market expects a 25bps cut to a cash rate of 4.10%. The view for the RBA to finally kick off its cutting cycle strengthened following the latest inflation outturn, which printed at 2.4% - well within the RBA's 2-3% target band. However, the strength of the labour market, resilient consumer spending and weaker currency could see the RBA cut with a hawkish bias.
• In the UK, the latest update on wages and inflation are expected to show an acceleration in price pressures. In the three months to December, private sector wage growth likely lifted 6.3% from 6% previously, a combination of base effects and a pick up in underlying pay momentum. Headline inflation in January also likely accelerated to 2.8% from 2.5%. The rise in the headline rate will be driven by fuel prices, education and airfares. Services inflation is also forecast to accelerate from 4.4% to 5.1%.

See our Weekly Calendar for more data releases and economic events this week.