Reserve Bank expected to start cutting rates later this year
Markets and economists are now expecting the Reserve Bank of New Zealand to start cutting its benchmark interest rate this year and wholesale interest rates have moved down in anticipation. Last week’s Consumers Price Index release supported the view that domestic-driven inflation pressures are easing, but perhaps not as quickly as the RBNZ had anticipated in their latest November Monetary Policy Statement.
Financial markets may be getting ahead of themselves, with market pricing anticipating the first cut as soon as May. This is common once you reach a peak in interest rates and markets start anticipating the next move – which nearly all agree is down.
The question is when – and what will the Reserve Bank say, and do, to stop financial markets getting ahead of where the Bank wants them to be.
In a speech yesterday, Reserve Bank chief economist Paul Conway maintained a more cautious stance as the Bank pushes back against financial markets. He reiterated that we still have a way to go to get inflation back toward the target midpoint of 2 percent. Part of this recognises that if he had taken anything but a hawkish stance, financial markets may have gone even further in anticipating interest rate cuts.
ANZ economists are expecting the RBNZ to deliver a steady sequence of 25bp OCR cuts starting in August.
The upshot is that we appear to be at the top of the cycle, but the Reserve Bank are pushing back on anticipations of cuts in the first half of the year. It will of course be data dependent.
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