It has become crystal clear that the Kiwi economy is not recovering. The Reserve Bank need to do more. And more we will get. We now expect a 50bps cut in October, followed by a 25bps cut in November. The cash rate should end the year at 2.25%. From there, we think there’s about a 50/50 chance of a further move to 2% in February. It will depend on how the data and recovery plays out. This summer will be an important time for data watching. Will the housing market pick up? Will consumer confidence lift into consumption? And will business confidence translate into activity? It will all feed into the February decision. We hope it will.

Our change in call stems from last week’s shocking GDP figures. The Kiwi economy slammed into reverse, contracting 0.9% over the June quarter. This compares to our and the Reserve Banks forecast of a 0.3% contraction.

It’s saddening to see an economy still contracting after last year’s deep and destructive recession. We fell into a hole last year. And we’ve only dug ourselves deeper. Over the year, the economy has shrunk a further 0.6%.

And as usual, things are even bleaker on a per capita basis. Economic growth on a per person basis contracted 1.1% over the quarter alone and is down 1.3% from June last year.

Taken at face value the significant drop-in activity proves, once again, that the RBNZ has not yet delivered the appropriate monetary policy setting. We have been advocating for a 2.5% cash rate for over 2 years. And now it is crystal clear that current monetary policy settings, with a 3% cash rate, are not enough. We are advocating and expecting a 50bp move in October. Get it done. Get to 2.5% asap. No more time for mucking around. Then get to 2.25% by year end. And keep your mind open. A further move to 2% remains a possibility.

A reminder to our readers, the RBNZ’s August rate decision came to a historic 4-2 vote, with two committee members favouring a 50bps cut. The seed has already been planted. And the recent flow of weak, uninspiring economic data could very well be the water that sees the dissenting view grow to become the consensus view. Plus, the data follows recent comments from Hawkesby that “While our central projection for the OCR is to fall to around 2.5% by the end of the year, that could occur faster or slower.” Well, it’s obviously going to have to be faster and deeper.

It’s time for leadership out of the RBNZ. And we’re due to learn of the new RBNZ Governor. Who we hope will focus on transparency and credibility.

Financial markets were also kept busy by a trio of central bank announcements. The US Federal Reserve and Bank of Canada have both returned to the cutting party. As widely anticipated, the FOMC cut rates for the first time this year. The 25bps cut takes the upper bound of the fed funds rate to 4.25%. There was a single dissent by new Governor Stephen Miran, who favoured a 50bps cut. The updated dot plot shows another 50bps of cuts this year, which was more than expected. Markets initially interpreted that as quite dovish, triggering a rally in bonds. But cool, calm and collected comments from Powell that the Fed are in no rush to cut rates, tempered the rally. All in all, there were some pretty whipsaw moves in markets on the day.

North of the border, the Bank of Canda cut to 2.5% after holding since April. The BoC’s return easing follows concerns that US-imposed tariffs are slowing growth and hiring in the Land of the Maple Leaf. There was no forward guidance but the market is still pricing in about 20bps of easing by the end of the year.

Finally, across the pond, the Bank of England voted 7-2 to hold the bank rate at 4%. They’re keeping a watchful eye on inflation. Policy guidance remains the same, with Governor Bailey noting “I continue to think that there will be some further reductions, but I think the timing and scale of those is more uncertain now”. The BoE also announced a slowing of the pace of QT – quantitative tightening – amid recent volatility in the gilt market. Through a combination of sales and maturing debt, the BoE will reduce its balance sheet by £70bn pounds per annum, down from £100bn.

Financial Markets

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

In rates, the shocker GDP sees Kiwi rates plummet

“In Kiwi rates it was all about the shocker Q2 GDP print. Though partly driven by seasonal factors, the -0.9% was unequivocally weak. This prompted a sharp rally in the front end and a reassessment by the market of the pace and magnitude of easing to be delivered by the Reserve Bank. There is now a good chance of a 50bps cut for October priced and 70bps of cuts total. Several banks also changed their call to a 50bps cut in October adding fuel to the rally. 2 Year down ended the week at 2.66%. High frequency PSI data, lost in the GDP fallout, also didn’t inspire much confidence in a rebound in activity coming in sub 50 again.

The Fed played a straight bat and didn’t attempt to out dove the market citing a less robust labour market and calling it a risk management move. A wide dispersion of views from the committee on where the fed funds rate ends up at will keep markets on their toes.

Looking ahead not a lot to get excited about before the October meeting apart from QSBO. Matthew Crowder Balance Sheet Manager – Treasury.

In currencies, the Fed eases but NZ data dominates the Kiwi dollar

“Last week, attention initially centred on the Federal Reserve’s rate decision and updated dot plot. As expected, the Fed cut its cash rate by 25bps and signalled a further 50bps of easing by year-end. However, the pace remains uncertain, with Chair Powell describing the move as a “risk management cut,” citing softening labour market conditions and ongoing inflation risks. Recent CPI and PPI prints have been benign enough to provide some confidence in their decision. The US dollar weakened modestly following the dot plot release but quickly regained support. Domestically, the standout event was New Zealand’s Q2 GDP, which contracted by -0.9%—a significantly weaker result than anticipated. The NZD fell against the USD, testing support around 0.5850, though still within recent ranges. The NZD/AUD cross saw a more notable move, breaking below the key 0.8950 level and closing the week at 0.8883 after touching a low of 0.8866. We now view 0.8950 as near-term resistance.

The softer Australian employment data on Thursday offered only brief support to the NZD/AUD. Looking ahead, the NZD/AUD cross is likely to remain capped at 0.8950–0.9000, with downside risks if the RBA adopts a more hawkish tone. While the RBA is expected to hold on September 30, growing calls for a 50bps cut from the RBNZ in October could further pressure the cross lower.” Mieneke Perniskie – Senior Dealer, Financial Markets.

Weekly Calendar

• Economic data is light this week. Aussie monthly CPI is the Australasian highlight. Market consensus expects the headline rate to rise to 2.9% from 2.8%. In a similar vein, US PCE closes out this week. Again, market consensus is for a move to 2.7%, the highest in six months.
• Instead, this week belongs to central bankers. RBA Governor Michelle Bullock will provide testimony on Monday. While appearances from Bank of England Governor Andrew Bailey and US Federal Reserve Chair Jerome Powell will be keenly watched in light of recent rate decisions. The Bank of Japan will also release the minutes of their July policy meeting.

See our Weekly Calendar for more.