RBNZ likely to adopt further 25bp rate cut in November, says ANZ Research

The Reserve Bank of New Zealand (RBNZ) cut the Overnight Cash Rate (OCR) by 50bp to 1.00 percent today, surprising everyone, with no analysts expecting such a large move; however, ANZ Research continues to expect a further 25bp OCR cut in November.

The RBNZ noted that the outlook for both global and domestic growth had deteriorated, and has revised down its growth forecasts markedly. However, it continues to forecast a stronger lift in activity over the next year, driven by investment, construction, and government spending.

That said, the Committee didn’t sound fully confident that this would actually eventuate: “The members discussed that if sentiment remained low, perhaps due to global economic conditions or if profitability remains squeezed, growth might not increase as anticipated over the medium term”.

The RBNZ now expects 0.5 percent q/q growth in Q2 (previously 0.7 percent), and have revised down growth in the second half of the year a touch. However, the acceleration in growth still looks more optimistic than ANZ’s own forecast. GDP growth is now seen as accelerating from a trough of 2 percent y/y in Q2 2019 to a peak of 3.1 percent y/y by Q3 2020 (previous peak of 3.3 percent in Q2 2020).

The outlook for non-tradable inflation is broadly similar in the near term to that projected in the May MPS. As before, non-tradable inflation is expected to pick up towards 3 percent over the medium term.

The outlook for tradable inflation is slightly softer in the near term, with low import price inflation weighing. Headline inflation is expected to gradually lift to the midpoint of the target band (2 percent) by Q4 2021 (previously by mid-2021).

"Although the move today was bigger than anyone expected, the door was left open to more. The OCR is forecast to trough at 0.91 percent, implying a better than even chance of a further cut – we forecast it to come in November," ANZ Research further commented in the report.