- The RBNZ signals more cuts are likely due to higher than expected exchange rate.
- Financial stability concerns appear less pressing now that the RBNZ is consulting on additional lending restrictions.
- We continue to expect the RBNZ will cut the OCR by 25bp a piece in August and November.
The RBNZ has sent a clear message that it is prepared to cut rates below 2%, despite not providing an interest rate decision today. The RBNZ is concerned that the inflation outlook has weakened on the back of a higher exchange rate and that “a decline in the exchange rate is needed.” The RBNZ also noted that the current strength of the exchange rate “makes it difficult for the Bank to meet its inflation objective.” We had been warning that the high exchange rate would ultimately force the RBNZ into cutting the OCR further and this statement reinforces our call.
For some time, the RBNZ has been stuck between a rock and a hard place as further policy easing risked stoking the housing market even further. However, now that the RBNZ has taken further steps to address its financial stability concerns, it appears more comfortable to react to the low inflation outlook. We continue to expect the RBNZ to cut the OCR two more times this year to 1.75% in response to the benign inflation outlook.