October NZ Economic Update

ASB Banner 25 October

Key highlights:

  • Outlook for Australian interest rates faces key week ahead.
  • Q3 CPI from Australia on Wednesday could tip the balance back towards a rate cut this year.
  • Weaker employment data already pushing the case for more policy easing.

The Reserve Bank of New Zealand is expected to cut the OCR a further 25 basis points on November 10, taking it down to 1.75%. However, there is less clarity over the Reserve bank of Australia’s near-term rates path. The cash rate was reduced 0.25% in May and August this year, leaving the cash rate at 1.50%. The former move was a surprise, prompted by the softening inflation picture.

Like the RBNZ, the RBA has been reacting to weak inflation/inflation expectations. However, a run of robust economic data in recent weeks had reduced the likelihood of the RBA cutting rates again in 2016. The chances of a cut by the end of 2016 stood at around 15% on October 17. That was some way from the 53% seen in late August, reflecting the improving economic data.

However, there has been a greater focus in Australia on the labour market, which had been showing some signs of improvement. The improved outlook was dented by the August and September data though, with the latter month seeing a drop in jobs of around 10k. That was the biggest one-month loss since April 2015 and the second negative read in a row and much worse than market expectations. On top of the drop, full-time employment declined 53k. This was partly offset by a 43.2k lift in part-time jobs, but even so the overall labour market weakened.

Following September’s employment report, the chances of another rate cut from the RBA this year rose again, coming back up to 21%. However, the definitive data likely to prove conclusive for the next step in rates is due tomorrow, with Australia’s Q3 inflation data out. The current market estimate is for a small acceleration to 0.5% qoq from 0.4%. That would push the annual rate up to 1.1% from 1.0%, although the CBA outlook is for 0.4% and 1.0% respectively. Despite the expected firming in inflation by the market, price pressures would still be some way from the RBA’s 2-3% target range, although that target range is for the average over an economic cycle.

Should the data come in somewhat softer than market consensus, then the November 1 RBA decision could see a shifting in tone, preparing the market for a cut on December 6, although inflation expectations data on November 10 will have a part to play. Conversely, should the result show price pressures are mounting, the chances of new Governor Lowe pulling the trigger this year would be cut to almost nil.

Current pricing has a 46% chance of one more cut in the current cycle, coming before the middle of next year, while the CBA outlook is for that easing in policy to arrive before 2016 is done.

 

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