RBNZ: A high bar for a 75bps cut – Standard Chartered

We think the bar is high for a 75bps OCR cut given the prevailing economic backdrop. Inflation in New Zealand is back within the target band, driven by disinflation in tradables. But non-tradables inflation remains stubbornly high; housing and insurance among the sticky components. NZD to underperform on rising odds of a Trump-Republican sweep and dovish RBNZ expectations, Standard Chartered’s economists Bader Al Sarraf and Nicholas Chia note.

Softening inflation, hard decisions

“Inflation, at 2.2% y/y in Q3-2024 (3.3% in Q2) – a touch softer than the Reserve Bank of New Zealand’s (RBNZ’s) 2.3% forecast ­– is back within the central bank’s 1-3% target band. This has led markets to anticipate more aggressive rate cuts, with latest market pricing indicating c.57bps of easing at the 27 November; this equates to around a 30% implied probability of a 75bps cut.”

“Historically, the RBNZ has tended to favour larger official cash rate (OCR) adjustments during periods of significant market shocks and economic surprises (Figure 1). During past crises, such as the Global Financial Crisis and the COVID-19 pandemic, the RBNZ responded with outsized OCR cuts of up to 150bps. Conversely, the Q3-2022 CPI that printed 0.8ppt above RBNZ forecasts led to a 75bps hike.”

“We do not think that the prevailing growth and inflation backdrop necessitates an outsized policy rate cut. While a 75bps cut cannot be ruled out at the November meeting, we think the bar for such a move is high, and we maintain our call for a 50bps cut. We expect the RBNZ to tread cautiously at this stage when contemplating further rate cuts, balancing the risks of an unintended boost to the housing market and NZD instability – both of which are key factors influencing the transmission of monetary policy to CPI inflation.”