RBNZ cuts OCR to 2%, signals at least one more – Westpac

Research Team at Westpac, notes that the Reserve Bank reduced the Official Cash Rate by 25bps to a record low of 2% and they also signalled that further easing is likely.

Key Quotes

“At today’s Monetary Policy Statement, the Reserve Bank reduced the Official Cash Rate to a new record low of 2%. Nevertheless, the RBNZ is still facing an uncomfortably slow return of inflation to target. Consequently, they noted that “that further policy easing will be required to ensure that future inflation settles near the middle of the target range” (our emphasis).

We expect a further 25bp cut in the OCR in November, which will take it to a low of 1.75%. While there is the possibility of an earlier cut at the 22 September OCR review, we think this is less likely given continued relatively firm GDP growth and only limited new information before the September meeting. Further ahead, much of the need for additional cuts comes down to the NZ dollar – we expect that it will ease by year’s end, but the risk is that it remains high.

Market implications

Today’s cut had been well signalled by the RBNZ, following an interim update in July. However, some in financial markets had speculated that the RBNZ would ease by more. As a result, NZD/USD rose from 0.7210 to 0.7270 following the Statement. Two-year swap rates initially rose 6 basis points, but this was later unwound.”