Another RBNZ Cut?

We could be heading into some significant volatility for the NZD later tonight in the lead up to and in the aftermath of the RBNZ interest rate decision.

There is an increasing chance that the bank might take action, with this being the last meeting for the year. As if to confirm this, Governor Orr has scheduled a press conference for an hour after the rate decision.

Expectations have been changing about the likelihood of a rate cut in the last few days. As recently as last Friday there was a bias in the consensus against a rate cut.

However, earlier today, the RBNZ released its inflation expectations report, which was lower than what the market expected. This influenced the math on the potential of a rate hike.

What We Are Expecting

The current consensus shows that there is about a 60% chance of a rate cut this time around. Not exactly a strong case for a more accommodative stance.

There also appears to be a significant split between what people say they are expecting, and where they are putting their money.

While the majority of analysts are calling for a rate cut, swap rates are not moving as strongly in that direction  This suggests that many investors are not willing to actually bet on a rate cut (though that gap has closed a bit in the final hours of the NZ trading day).

The Case For

Analysts argue that economic growth has been the weakest since 2013, and business confidence remains depressed. Inflation has been struggling so far this year, staying away from the bank’s target.

Additionally, the RBNZ has mentioned previously that they are more concerned with economic growth than strict currency stability. Then there is the fact that there isn’t a scheduled meeting for a while, so this the last chance for the bank to adjust rates.

The Case Against

Those who suggest the RBNZ might hold until February point to the weaker exchange rate, which while beneficial for exporters, drags on inflation.

On the other hand, recent electronic card transactions have turned up, and the building sector seems to have found some footing. This shows that the housing issues from earlier in the year are probably at an end.

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