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On Wednesday, Capital Economics maintained their prediction that the Reserve Bank of New Zealand (RBNZ) will reduce its Official Cash Rate (OCR) by 50 basis points to 3.75% during its upcoming meeting on February 19.
The firm anticipates that subsequent cuts will be of 25 basis points each, as the RBNZ continues to address excess capacity in the New Zealand economy.
Despite the RBNZ’s recent 50 basis point cut in November, which aimed to control inflation, Capital Economics projects additional rate reductions, with a terminal policy rate forecast of 2.25%.
This estimate is below the consensus view. The November cut was in line with expectations, and RBNZ Governor Adrian Orr hinted at further early-year action consistent with another 50 basis point cut in February.
Recent data has not signaled a need for the RBNZ to alter its indicated path. Although Q4 headline inflation remained at 2.2%, slightly above the Bank’s forecast, this was due to the volatile tradables component.
More stable non-tradables inflation was actually lower than expected. Additionally, labor market conditions have weakened, with unemployment rising to 5.1% in Q4 and private-sector wage growth slowing.
The latest GDP revisions present a complex picture. While past recessions were revised away, indicating a higher output level in Q2 than previously thought, there was also a significant slowdown in economic momentum in the latter half of the year.
The RBNZ may adjust its focus to the output gap, which was -0.8% of GDP in Q3, better than the anticipated -1.4%. However, potential GDP estimates could be revised, impacting the output gap assessment.
Despite the certainty of a rate cut this month, the future rate path is less clear. The RBNZ has signaled further reductions towards a 3% OCR, aligning with its neutral rate estimate.
Markets seem to believe the Bank’s guidance. Yet, Capital Economics argues that the RBNZ has historically been too cautious with its rate cut forecasts, often having to adjust them due to weaker-than-expected economic indicators.
With the RBNZ set to update its projections soon, Capital Economics remains confident in their below-consensus terminal rate prediction.
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