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On Thursday, Capital Economics shared insights into the monetary policy paths of the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ), suggesting a more cautious approach by the RBA compared to its New Zealand counterpart.
The RBA’s April meeting minutes showed the central bank’s decision to maintain the interest rate at 4.10% was influenced by balanced risks to its economic outlook.
Despite market expectations for significant rate cuts, Capital Economics anticipates a more measured response from the RBA.
The firm projects only two additional rate cuts of 25 basis points each in the upcoming months of May and August, contrary to the market’s forecast of a 125 basis point reduction to 2.85%.
The Australian labor market’s resilience, with the trend unemployment rate holding at 4.0% and the underemployment rate decreasing, underpins Capital Economics’ outlook.
This strength, coupled with signs of economic recovery, including a 0.6% quarter-over-quarter GDP growth in Q4 and an estimated 0.5% increase in Q1, leads the firm to predict the unemployment rate will stabilize at 4.1% for the remainder of the year.
In contrast, Capital Economics expects the RBNZ to implement more aggressive rate cuts, totaling 100 basis points, bringing the rate down to 2.5%.
The firm argues that New Zealand faces greater economic challenges, including a more significant impact from the US-China trade war and deeply negative output and unemployment gaps, necessitating more substantial monetary easing.
Today’s unexpected rise in New Zealand’s CPI is seen by Capital Economics as not altering the broader monetary policy outlook, attributing the increase to volatile items and price changes in regulated sectors.
Core inflation measures continue to show a disinflation trend, supporting the firm’s expectation of further RBNZ rate cuts.
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