Analysts at BNZ point out that the odds of a rate cut from the Australian central bank escalate, leading to an increase in the global view that the Reserve Bank of New Zealand will follow suit. They don’t believe the RBNZ has a reason to cut rates.
Key Quotes:
“Our colleagues at NAB have just announced their expectation that the Reserve Bank of Australia will cut its cash rate twice before the end of 2019. With conditions deteriorating in the Australian economy and the RBA clearly backing away from its tightening bias, the probability of an easing there is certainly rising. Indeed, the Australian Futures market is pricing in a 100% chance of a rate cut by September and a 50% chance of a further cut by year’s end.”
“We see no reason to believe any cut in interest rates by the RBA would necessitate the RBNZ following suit. Current market pricing sees at least one rate cut as being definite for Australia while New Zealand prices a 70% chance of a reduction in rates”
“Without a drought (unlikely) or a major external shock (plausible) we see no reason for the RBNZ to cut rates. It looks unlikely to us that the unemployment rate will deviate significantly from a level considered consistent with maximum sustainable employment nor will annual CPI inflation deviate significantly from target. Unless these things happen then an Australian rate move in and of itself should not generate an RBNZ response.”
“There is a chance that any softening in the Australian economy will have flow on impacts for New Zealand. In particular, a softening Australian housing market and weaker labour market conditions could impact the New Zealand economy. But before this impact can have a meaningful effect on domestic monetary settings New Zealand would have to satiate the current excess demand for both labour and housing. Given that this will take some time, we would argue that any Australian downdraft would be felt with a relatively long lag. This means that even if the RBNZ was to respond it would be much more likely to be next year than this.”
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