RBNZ: Slash or Burn? - BNZ

Stephen Toplis, Head of Research at BNZ, suggests that if the RBNZ remains fully committed to pushing CPI inflation higher then it has absolutely no option but to cut the cash rate this Thursday, pencil in at least one further reduction and commit to ongoing rate cuts if need be.

Key Quotes

“Only then does it stand any chance of keeping the NZD in check which, currently, is about all it can hope for in a world where central banks seem to have less and less impact on economic outcomes.

We believe the RBNZ will cut rates this Thursday and build two further rate cuts into its central scenario. Anything less and the NZD will head higher still and the Bank’s credibility will be brought into question.

We are now inserting another cut into that track for the September OCR review. On this basis, we now see the cash rate troughing at 1.50% by the end of this year. By then we think it will be clearer that inflation will pick up allowing the cash rate to stabilise.

The balance of risks around these forecasts should be seen as symmetric. If the NZD slumps, the Fed tightens, house price inflation accelerates, the labour market tightens further and dairy prices bounce then there will be fewer rate cuts than we have forecast. If, on the other hand, the NZD stays stronger for longer, the global economy weakens and the Fed delays further then more OCR stimulus would be forthcoming.”