RBNZ likely to slash cash rate to new record low of 2 pct

The Reserve Bank of New Zealand is expected to slash the central bank’s Official Cash Rate (OCR) by 25 basis points to new record low of 2.00 percent at its monetary policy meeting scheduled to be held on August 11 (21:50GMT).

Historically, the RBNZ has delivered larger cuts only during emergency situations, which is hardly the case at present. But an explicit easing bias is expected to be retained, with the bill projection implying at least one more cut, and alternative scenarios reinforcing more if required, ANZ reported.

Moreover, last month’s economic update will likely form the basis of the policy assessment. While the RBNZ will retain a positive view towards domestic growth prospects and still see financial stability risks from housing (mitigated to a degree by recent macro-prudential policy measures), the reality remains that the strong NZD is making it quite difficult for the Bank to meet its inflation objective.

The strong NZD will lower the Bank’s near-term annual inflation forecasts by perhaps around 0.5 percentage points, mechanically forcing a lower 90-day bank bill profile. The market participants are pricing in for at least one more official cash rate (OCR) cut.

However, against the backdrop of strong domestic growth, coupled with merging capacity pressures, an aggressive measure of lowering interest rates may not prove good in the economy’s medium-term interests.

Meanwhile, Thursday's OCR cut is likely to be accompanied by a statement in which the central bank acknowledges that "further easing may be required," noted Westpac economists. They believe the central bank will follow through with a further 25 basis points cut in November.