Tack And Jibe Like An AC75. The RBNZ Delivers 50bp!

• The RBNZ cut the official cash rate by 50bps to 4.75%, as we expected. It follows the 25bp cut at the August MPS. We expect another 50bps cut in November. The Kiwi economy needs it. And there’s a long gap until they meet again in 2025.
• The Kiwi economy continues to operate below its productive capacity. Spare capacity is building. There’s further disinflation pressure to come. The case for maintaining restrictive policy is done. We need a full reversal back to neutral, and that’s below 3%.
• The market reaction was relatively muted given that the outsized move was largely priced. An already soft Kiwi dollar was pushed slightly lower, and wholesale interest rates were little changed.

We've seen more tacking and jibing from the RBNZ than you’d expect to see out of a foiling AC75 Americas cup boat. After coming off their foils in May, the RBNZ headed downwind in July, with a tactical change in sails. The manoeuvre enabled them to cut in August, regaining speed, and respect. The nosedive in May, long forgotten. And now they’ve gained speed by cutting 50bp. The spectators on the rocky shores, delighted at their progress.

As the RBNZ gains knots on the race course, the knots in traders stomachs, were untied. Those calling for 50bps today were rewarded. It’s always super simple in hindsight, but there were plenty of nerves going into today’s announcement. It won’t get much attention, but the RBNZ has snuck back in below the Fed, which should help with the Kiwi currency. The Fed delivered a 50bp move to 5% (from 5.5%), leapfrogging the RBNZ’s earlier 25bps move to 5.25%. Well now, the RBNZ is at 4.75%, putting their nose back in front.

Having reached an annoying peak of 0.6374, at the start of October, the flightless Kiwi has dipped back below 61c (at time of writing). We may, we just may, see the low of 0.5861 again (last traded on 30th July). Indeed, our year end forecast is 0.59c, and today’s move by the RBNZ certainly helps that call.

Accompanying the press release, the RBNZ also published the Summary Record of Meeting. And a key line in the ROM was: “Members agreed that increasing excess capacity is leading to lower inflationary pressure in the New Zealand economy” (RBNZ, Oct24). Back in August, the RBNZ noted: “increased spare capacity” (RBNZ, Aug24). Forgive us for getting grammatical, but it’s a subtle yet important switch in verb tense – from “increased” to “increasing”. And it tells us that, like us, the RBNZ is seeing a continued build up in spare capacity in the economy. And that means more disinflationary pressure to come . Recent pricing indicators are tilting the balance of risks towards inflation falling below 2%. As the latest NZIER survey revealed, a declining share of firms have and are indenting on raising their prices.

The ROM also revealed that a 25bps cut was considered. But the RBNZ settle on a 50bp cut, as it was deemed the “most consistent with the Committee’s mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate” (RBNZ, Oct24). Given market pricing, a 50bp cut was always going to be the scenario resulting in little market reaction – as was the case. Instead we suspected that a smaller cut would be the move to set off the fireworks. Given today’s result, the RBNZ was also weary of causing unnecessary market volatility.

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