RBNZ Rate Cut Forecast: What to Expect on November 27, 2024

Image: www.rnz.co.nz

As New Zealand's economic landscape continues to face challenges, all eyes are on the Reserve Bank of New Zealand (RBNZ) ahead of its policy meeting on November 27. Market signals suggest that a 50-basis point rate cut is almost certain, with a 22% probability of a deeper 75 basis point reduction. Here’s a closer look at the likely scenarios, the economic context, and the potential market impact. 

Current Economic Conditions 

New Zealand's economy has shown signs of strain, largely due to the prolonged period of high interest rates. The RBNZ’s aggressive tightening cycle, which began in 2021, aimed to curb inflation but has also slowed economic growth significantly. Recent data suggests that the economy may have entered a recession in the third quarter of 2024, further complicating the central bank's outlook. 

Additionally, New Zealand's currency, the kiwi (NZD), has come under pressure, hitting multi-year lows against major currencies like the Australian dollar (AUD) and U.S. dollar (USD). The decline in short-term bond yields, which typically follow rate expectations, indicates market anticipation of a policy shift to support economic recovery. 

What to Expect on November 27 

The RBNZ is widely expected to cut rates by 50 basis points, reducing the official cash rate (OCR) from 4.75% to 4.25%. This move would follow the central bank's previous cautious approach to easing, acknowledging the economic slowdown without risking too much inflationary pressure. 

However, there remains a 22% chance of a more aggressive 75 basis point reduction. While this is less likely, it is not entirely out of the question, especially considering the ongoing economic weakness and Governor Adrian Orr’s recent comments about the need for a balanced response to inflation and growth. 

Economic Pressures Driving the Decision 

Several factors are driving the RBNZ’s decision-making process: 

• Slowed Economic Growth: The high-interest rate environment has dampened business investment and consumer spending, leading to a slowdown in economic activity. 

• Recession Risks: Early data suggests that New Zealand’s economy may have contracted in Q3 2024, heightening concerns over a potential recession. 

• Weakening Currency: The New Zealand dollar’s continued depreciation, coupled with declining bond yields, suggests the market is already pricing in a rate cut. The RBNZ may act to prevent further NZD weakness. 

Potential Market Impact 

A 50-basis point cut is likely to trigger a further decline in the New Zealand dollar, which has already faced significant downward pressure in recent weeks. If the RBNZ goes for the more aggressive 75 basis point cut, the NZD could face an even sharper drop, with heightened market volatility. 

In the medium term, a 50-basis point cut would likely provide some relief to the economy by easing borrowing costs and stimulating demand. However, it would also signal that the RBNZ remains cautious about the risks of inflation and the lingering effects of high interest rates on the real economy. 

Should the RBNZ opt for a 75-basis point cut, the move would indicate a more urgent response to worsening economic conditions. In this scenario, we could see a more significant depreciation of the NZD, and the markets would likely react with increased uncertainty. 

Conclusion 

The RBNZ is expected to deliver a 50-basis point rate cut on November 27, with a smaller chance of a larger, 75 basis point reduction. As New Zealand continues to navigate a challenging economic environment, the central bank's decision will be closely watched by traders and investors alike. A rate cut is likely to place continued pressure on the New Zealand dollar, though the longer-term impact will depend on the effectiveness of the RBNZ’s actions in stimulating growth and managing inflation.