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Sharon Zollner, chief economist at ANZ, notes that the RBNZ today cut the OCR 25bp to 1.50% and struck a dovish tone.

Key Quotes

“In sum, “The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit.” We agree, as it happens, but had believed on balance that they would require a little more evidence before leaping into action.”

“The Committee did not give strong guidance that further cuts could be expected, describing the outlook for interest rates as now “more balanced”. The OCR is forecast to be at 1.48% by the end of the year, implying they do not expect to be cutting again anytime soon. The track implies a 50% chance of a further cut sometime next year, but then increases over the projection.”

“The RBNZ now expects only 0.4% q/q growth in Q1 (previously 0.8%), but have kept Q2 unchanged at 0.7% and bumped up growth from the second half of the year. GDP growth is now seen as accelerating from a trough of 2.0% y/y in Q2 2019 to a peak of 3.3% y/y by Q2 2020 (previous peak of 3.1% in Q3 2019).”

“One and done” would be a very unusual cutting cycle. It could happen, since the RBNZ has acted more proactively than has historically been the case, but we continue to forecast that this is just the start of a sequence of three cuts. Given the magnitude of the downward revision to the RBNZ’s Q1 growth outlook, the hurdle for near-term further disappointment is high, but the RBNZ’s growth forecasts further out are considerably higher than our own.”

“Lower interest rates will support growth, but too-high interest rates are not this economy’s problem at present. We therefore forecast that by November the ducks will have lined up for another cut, followed by one in February. In our view deterioration in global conditions is the primary risk that could bring this forward.”