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.

The Situation

The RBNZ has been the most aggressive in their cuts of the major central banks. In fact, it was the first to start the recent race to the bottom.

Despite this, however, general economic data from New Zealand has continued to underperform, even as interest rates approach what is seen as the lower bound. Arguably, the RBNZ is running out of ammunition in an era of increasing economic uncertainty.

The Outlook

In any case, there still is a strong consensus that the bank’s projections will remain firmly dovish. Along with the rate decision, we also get the Monetary Policy Statement. In the statement, the RBNZ will give its projections of how rates will evolve in the future.

As a matter of comparison, the current market projections are for one rate cut by February to 0.75% (that is, a cut either tomorrow or in the next meeting), to be followed by a further cut in the second quarter of next year.

This would bring the rate to the lower end of the range at 0.5%, and presumably the end of the cutting cycle.

So far this year, the NZD has been the worst of the majors in performance compared to the US dollar. A hold by the RBNZ might give the currency a boost in the short term. However, the consensus among analysts is for further weakness into the new year.