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RBNZ likely to keep rates on hold in November before cutting twice next year, says Capital Economics

The Reserve Bank of New Zealand (RBNZ) is expected to keep rates on hold in November before cutting twice next year, while the consensus expects rates to be cut in November and once more in 2020, according to the latest research report from Capital Economics.

As widely expected the Bank kept rates on hold in September and sounded relatively upbeat in the minutes of the meeting and noted that August’s 50 basis point cut had resulted in lower deposit rates and a currency depreciation.

Admittedly, if the Bank goes against the analyst consensus in November it could face a currency appreciation. And the Bank has been particularly concerned about the exchange rate in recent times.

The additional cuts by the RBA in October and by the US Fed in November will also be putting pressure on the Bank. It may, therefore, be the case that the Bank bows to the analyst consensus and cuts rates in November, the report added.

However, financial markets only price in a 50 percent chance of a cut. That means that the exchange rate may not rise that much if the Bank keeps policy settings unchanged. And while the New Zealand dollar has increased a little in recent weeks it remains much lower than the Bank had forecast in their August statement.

Turning to the labour market, despite the rise in Q3, the unemployment rate isn’t any higher than it was in the first quarter at 4.2 percent. In their last set of forecasts, the RBNZ had expected the unemployment rate to rise to 4.4 percent in the third quarter.

"While we suspect the Bank will only cut rates twice more by the middle of next year, the risks of the RBNZ hitting the zero lower bound are growing. If the outlook deteriorates much more sharply than we are anticipating and if fiscal and macroprudential policy proves insufficient to stem the downturn, we believe the Bank would not hesitate to use unconventional monetary policy. In that situation, we think modestly negative rates would be the first tool the Bank uses," Capital Economics further commented in the report.

By Debarati Bir
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