- The RBNZ’s policy decision is approaching. Will they cut? Yes. Will they signal another cut to come? Yes. Will it be enough? Not quite. There’s no doubt that the Kiwi economy needs support. There’s no doubt the RBNZ needs to stimulate. But there is doubt that they will deliver? They should.
- The weakness in the economy demands stimulus. With all the risks offshore, and the pain still felt onshore, there's a good argument to be made for taking policy into stimulatory territory asap. An argument that is growing in support.
- Our Charts of the Week look at the latest REINZ housing data, which much like the current season, feels stuck in an endless winter. House prices have dipped for a second month in a row. And activity remains subdued.
From the RBNZ’s perspective, this week’s decision, with updated forecasts, sets the scene for the next 3 months (see our full preview). And it will help set the trading ranges for financial markets. The economic data and developments since the last MPS have strengthened the case for a more “go for growth” focussed RBNZ. The RBNZ will have removed the restrictiveness of monetary policy… but that is not enough.
Wednesday’s decision by the RBNZ should set a policy path that is right for the recovery. We need a stimulatory monetary policy setting. So, what do we mean?
Estimates of a “neutral” setting – when policy is not hurting but certainly not helping – range from 2.5-3.5%, with 3% being roughly right. So, a cash rate of 3% isn’t stimulatory, and it isn’t encouraging excessive behaviour or inflation. But we need a stimulatory rate if we’re going to encourage businesses to take on risk – by either investing or hiring. And we need a stimulatory rate if we’re going to see embattled households boost discretionary spend. 2.5% is closer to what we need. And the risks are towards a 2% cash rate, not 3%, in our opinion.
That said, the RBNZ has proven to be reluctant, all the way down. A more decisive RBNZ would be viewed positively across the road (Terrace), given the difficulty the Government has in balancing the books. And a more decisive RBNZ would be viewed positively by Kiwi business owners, property investors, and most households with debt.
Unfortunately, it is never straight forward. And there are three likely scenarios that could play out on Wednesday:
The first scenario is the one the RBNZ may find the easiest to deliver. The RBNZ delivers a 25bp cut and leaves the OCR track at 2.85% or thereabouts. This would not go down well. Wholesale market traders would push interest rates higher, again frustrated by the RBNZ’s reluctance in getting the job done. The OCR endpoint priced into the OIS strip would lift from ~2.71% towards 2.85-2.9%. Unhelpful. The pivotal 2-year swap (interest) rate would rise from around 3.06% now to 3.15% (about 15bps). Mortgage rates would barely move… although they had been lowered a little in response to the recent fall in wholesale rates. But the risk then turns towards a slight lift in mortgage rates. Very unhelpful. The Kiwi currency would pop higher, towards 60.50c and possibly 61c in time. Not what exporters want to see with an intrusive 15% tariff from the US.
The second scenario is what we think they will do, with least regret and least resistance. A 25bp cut accompanied by a lower OCR track to 2.7% (or close to). Currently, most economists sit between a low of 2.5% (Kiwibank) and a high of 3%. This scenario will push most economist forecasts to a lower 2.25-2.75% range. Such a move would support current market pricing of a 2.71% terminal rate. The 2-year swap rate should ease back to 3%, supporting current mortgage rates. The short dated mortgage rates may ease a little more, whereas the 3-5 year rates may not move much at all. The Kiwi currency would probably stay around 60c. It’s a move that supports markets, but does not stimulate.
The third scenario is ‘go for growth’ and generate greenshoots. A Doveish Hawkesby should put a 2.5% cash rate firmly on the table. The shock without Orr would see wholesale rates continue their downward spiral. The 2-year swap rate would ease towards 2.8%. All mortgage rates would likely be lowered, as needed. And the Kiwi currency would fall towards 58c, giving a bit of relief to exporters, and helping to offset the US tariffs.
Financial Markets
The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.
In rates, it’s a waiting game for the RBNZ
“Kiwi rates remained range bound last week, moving in only limited sympathy with global yields, waiting instead for the RBNZ to give it direction. US treasuries were much more energetic. Initially, US CPI data was interpreted as showing tariffs having a limited impact on goods prices and were seen as positive for rate cuts. However, this was somewhat undone by a hot PPI print, which rose by the fastest monthly pace in 3 years. Taken together, it seems that even if consumers are not yet facing higher prices, tariffs are still very much impacting producers.
On Tuesday, RBA delivered a cut as widely expected but a slightly more dovish set of forecasts that had the terminal cash rate lower. Friday saw some focus return to Kiwi, as some market participants look to de-risk ahead of the RBNZ meeting. Though there was little reaction to the July PMI increasing to an expansionary level. SPI came in as expected, serving more as a reminder that Q3 CPI is still at risk of testing the top of the 1- 3% inflation band.
For NZ, this week is all about the MPS, with a cut widely expected. However, significant uncertainty remains on the revised forecasts and OCR track.” Matthew Crowder, Balance Sheet Manager – Treasury.
In currencies, the Kiwi may find some direction with the MPS
Last week the Kiwi dollar traded in a familiar range. One could argue that is was hardly a range, and really just a ‘familiar pocket’. After commencing the week at 0.5930/0.5950, this Kiwi managed a very modest lift to 0.5996 on the back of the US CPI print, which showed a benign lift in inflation for the US. The US dollar got a modest push lower following comments from politicians (that’s right, not Fed officials) that indicated that the Fed should be cutting rates quite aggressively. That was quickly put to bed however, by the US PPI print on Thursday, that indicated the strongest lift in US producer prices since March 2022, and the US dollar went higher again. Over the last couple of weeks it has felt very much as though currency markets are waiting on something to happen before they can find some direction. We would like to be able to say that this may be the week for the Kiwi dollar to get a little more direction given this week’s MPS, but that may not be the case. We are ultimately waiting on direction queues from the US Dollar, or realistically The Fed’s FOMC in September. Having said that, there is always the potential element of surprise at a live MPS that can give the Kiwi a bat in a new direction. This week, the most probable outcome is a 25bp cut, and an OCR track moving from 2.85% down to 2.70% (or thereabouts). This is probably going to mean status quo for the Kiwi, as this is what is effectively already priced. However, a more dovish track could see the Kiwi closer to the 0.5850 or (if its dovish enough) 0.5800 level. Anything on the more hawkish or overly cautious side (OCR track at 2.85% or above), we might see the 0.6000 level. In the end, until we know whether or not the Fed are going to take the plunge in September, the NZDUSD cross may be a boring little story indeed this week. Potentially the NZDAUD cross may get more momentum to force it out of that painted on range (0.9110-0.9170). A dovish MPS this week should see the 0.9100 level breached, to 0.9050. Anything else, it’s probably status quo. Mieneke Perniskie, Senior Dealer - Financial Markets.
Weekly Calendar
- The RBNZ is the focus for domestic markets this week. The official cash rate is widely expected to be lowered by 25bps to 3%, following the pause in July. The RBNZ is also set to issue a new OCR track and forecasts. Since July, the data has either printed in line with the RBNZ's May forecasts or softer. The risks to the outlook remain tilted to the downside and originate from offshore. If the OCR track is lowered to a 2.70% trough, which would support market pricing, then market reaction should be limited.
- For financial markets, all eyes and ears are on the Jackson Hole Economic Policy Symposium - the annual gathering of central banks. This year's theme is "Labour Markets in Transition: Demographics, Productivity, and Macroeconomic Policy". It'll be the last event for Fed Chair Jerome Powell before his term ends next May. Powell will open the conference, and may signal a rate cut in September through his characterisation of the labour market. Last year, he used his speech to ready markets for the easing cycle.
See our Weekly Calendar for more
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