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Earlier today, as expected, the Reserve Bank of New Zealand left the cash rate unchanged at 1.00% and kept an easing bias. Analysts at BNZ consider that growth won’t meet RBNZ projections so they increased they expected easing measures.

Key Quotes:  

“There were some in financial markets who were looking for a more dovish statement as the NZD jumped after its release and there was a small sell-off in rates. We suspect this was more about positioning than the market, as a whole, being caught off guard.”

“What is likely to have more of a bearing on the November decision is the likelihood that the RBA will have lowered its cash rate a further 25 basis points by then. Our NAB colleagues believe the rate reduction will come as early as next week. They also believe the RBA will follow this up with another cut (to 0.5%) in December.”

“Softer than expected growth is likely to dominate the RBNZ’s thinking so we are today including a February rate cut into our forecast cash rate track in addition to the reduction we expect in November. We are quick to note that this shift in stance has been well foreshadowed and we are doing it today because we have recently lowered our growth forecasts not because of anything in the OCR statement.”

“We caution that fiscal easing is not that simple. Extra spending on infrastructure might be problematic given the capacity constraints that exist, tax cuts don’t appear to be on the government’s agenda, and the government must be very cautious in ensuring that any increase in expenditure is more about quality than quantity. We should also add that regulatory changes could be looked at to play a major role in stimulating the economy, and at relatively low cost. Anything that the government can do to assist in removing the bottlenecks that seem to be afflicting so many businesses at the moment would be welcomed.”