RBNZ likely to cut rates to 2.50% – Nomura

FXStreet (Delhi) – Charles St-Arnaud, Research Analyst at Nomura, suggests that all things considered, we believe that the RBNZ will cut its policy rate by 25bp at next week’s meeting but it will be a very close decision.

Key Quotes

“The Reserve Bank of New Zealand (RBNZ) holds its next policy meeting on 10 December. At the 28 October meeting, the RBNZ kept its policy rate unchanged at 2.75%. In the statement following the decision, the RBNZ said that “to ensure that future average CPI inflation settles near the middle of the target range, some further reduction in the OCR seems likely”. The central bank added that “this will continue to depend on the emerging flow of economic data. It is appropriate at this time to watch and wait,” suggesting that it was in no hurry to cut rates yet.”

“At the time of the October meeting, we believed that the decision was a close one as to whether to cut then or at the December meeting. We argued that the RBNZ would ultimately decide to wait for the December meeting, as the release of the updated forecast in the Monetary Policy Statement (SMP) and the press conference that followed the decision would allow the RBNZ to better communicate the reasoning behind its decision.”

“Next week’s decision will be a close one, in our view. On one side, the activity data suggest that the growth outlook is not worsening. However, on the other side, there are further signs that inflationary pressures have moderated somewhat, given the NZD appreciation, weak wages and the increase in the unemployment rate.”

“The question going into next week’s meeting is how worried the RBNZ will be regarding the outlook for inflation, especially since it warned at the October meeting that it may need to cut rates to offset the deflationary impact of the stronger currency. As such, the publication of the Monetary Policy Statement (SMP) provides the RBNZ with a good timing to act. However, there is also a chance that the RBNZ may decide to wait for the Federal Reserve to hike rates before taking a decision, hoping for some downward pressures on the currency.”

“If the RBNZ decides to leave rates unchanged, the rate cut could be delayed until the March meeting, when the RBNZ releases the SMP, which seems a very long delay.”

Charles St-Arnaud, Research Analyst at Nomura, suggests that all things considered, we believe that the RBNZ will cut its policy rate by 25bp at next week’s meeting but it will be a very close decision.

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