RBNZ may be next central bank to turn dovish as worries grow

WELLINGTON • New Zealand’s central bank may acknowledge the rising risk of an interest-rate cut when it delivers its first policy decision of the year.

While governor Adrian Orr is expected to hold the official cash rate (OCR) at a record-low 1.75%  today and signal no change for some time, he could concede there’s an increasing possibility of looser policy as global growth concerns mount. Traders have ramped up bets on a rate cut and are now pricing a 90% chance of one by November, swaps data show.

“The Reserve Bank of New Zealand (RBNZ) will reaffirm a data- dependent ‘watch and wait’ stance, though the ‘worry’ element is growing,’’ said Sharon Zollner, chief New Zealand economist at Australia and New Zealand Banking Group Ltd (ANZ) in Auckland. “When global growth slows, the New Zealand economy inevitably feels the chill, and the data flow out of both China and Australia, who together take 40% of our goods exports, has turned rapidly south.’’

The RBNZ will publish its decision at the new time of 2pm in Wellington as it prepares for the formal introduction of an enlarged policy committee later this year. Orr will hold a press conference an hour later.

Globally, central banks are growing more wary of raising rates amid slower expansion and risks such as the US-China trade dispute and Brexit. The US Federal Reserve has paused its rate increases, while Australia’s Reserve Bank this month abandoned its tightening bias as a slumping property market damped the inflation outlook.

The RBNZ may follow suit after New Zealand’s economy slowed in the second half of last year, jobs growth stuttered and the housing market cooled. The nation’s benchmark 10-year bond yield dropped to a record low of 2.08% last week, leading an Asian bond rally as investors turn to less risky assets.

Economists’ Views

While the RBNZ is unlikely to adopt an explicit easing bias, economists think it may move to a neutral stance by pushing its forecasts for higher rates further out into the future.

Westpac Banking Corp chief New Zealand economist Dominick Stephens said he expects the RBNZ’s new OCR forecast to be flat through mid-2021. In November, the central bank projected rates would start to rise from the third quarter of 2020. Westpac itself forecasts no change in rates until 2022.

“That is as far as the proverbial eye can see,” said Stephens. “What we are really saying is that the OCR outlook is evenly balanced for the foreseeable future, with risks on both sides.”

Kiwibank chief economist Jarrod Kerr went further.

“Rather than push out our call for hikes like most, we’re evaluating the very real risk of rate cuts,” he said. “We need to see how key developments offshore play out in coming months, including the US-China talks and Brexit. For now, interest rates are more likely to fall than rise.’’

ANZ’s Zollner, who is already forecasting the RBNZ will cut rates in November, said there’s no urgency for the bank to alter its stance because inflation is near its 2% target and the economy continues to grow.

“It isn’t a necessary component of our November cut call that the RBNZ jumps on the dovish bandwagon so soon,” she said. “But we believe the RBNZ will want to clearly signal that it is cognizant of the emerging risks to the growth and inflation outlook.” — Bloomberg