Next week the RBNZ meets and is widely expected to cut the policy rate 25bp to 3.0%. This comes on the heels of the June meeting where the RBNZ surprised the market with a 25bp cut.
We think the RBNZ could surprise markets again; this time by easing more aggressively with a 50bp cut.
Notably, the recent swing in the terms of trade and second-round effects on growth and inflation have been the dominant drivers of the RBNZ about-face. Indeed, dairy prices fell 37% in June from a year earlier while in level terms New Zealand’s dairy price index rests at near decade lows.
Moreover, high-frequency data continues to suggest the economic outlook is worsening with data surprises negative and deteriorating. Inflation has also drawn a lot of attention recently. The Q2 release disappointed expectations, coming in at 0.4% QoQ vs 0.5% expected.
By the same token inflation has continually undershot the RBNZ’s target over the past few years, prompting policymakers to indicate they have further room to cut rates.
In turn, we expect another cut.
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