RBNZ likely to cut OCR again in November, one more to follow early next year: ANZ Research

The Reserve Bank of New Zealand (RBNZ) is expected to adopt a cut in the Overnight Cash Rate (OCR) at its moentary policy meeting in November, after having done so today, with one more to follow by early next year, according to the latest report from ANZ Research.

The central bank cut its benchmark interest rate, citing slower global and domestic growth; both the market and analysts were divided on what action the RBNZ would take today, meaning a market reaction was guaranteed either way.

Further, it stuck a dovish tone, noting that global economic growth has slowed but also that some indicators had improved lately, while on the domestic front, "the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly".

In sum, "The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit."

However, the Committee did not give strong guidance that further cuts could be expected, describing the outlook for interest rates as now “more balanced”. The OCR is forecast to be at 1.48 percent by the end of the year, implying they do not expect to be cutting again anytime soon.

The track implies a 50 percent chance of a further cut sometime next year, but then increases over the projection. In practice, the market is likely to continually try to front-run cuts, as a single cut followed by a prolonged hold would be unprecedented. But given the uncertainties it makes sense for the RBNZ to tread carefully for now, the report added.

The RBNZ now expects only 0.4 percent q/q growth in Q1 (previously 0.8 percent), but have kept Q2 unchanged at 0.7 percent and bumped up growth from the second half of the year. GDP growth is now seen as accelerating from a trough of 2.0 percent y/y in Q2 2019 to a peak of 3.3 percent y/y by Q2 2020 (previous peak of 3.1 percent in Q3 2019).

Additional monetary stimulus has introduced a strong cyclical uplift into annual GDP growth, which still looks a little on the optimistic side compared to our own outlook. The output gap now peaks at 0.6 percent of potential output (versus +0.5 percent in the February projections), but slips into negative territory in the near term.

"Given the magnitude of the downward revision to the RBNZ’s Q1 growth outlook, the hurdle for near-term further disappointment is high, but the RBNZ’s growth forecasts further out are considerably higher than our own. Lower interest rates will support growth, but too-high interest rates are not this economy’s problem at present. We therefore forecast that by November the ducks will have lined up for another cut, followed by one in February. In our view deterioration in global conditions is the primary risk that could bring this forward," ANZ Research further commented.