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UBS signaled that the Reserve Bank of New Zealand (RBNZ) may consider a more aggressive 50 basis point rate cut in its upcoming April meeting. This projection comes as a response to the recent announcement of U.S. tariffs and the potential negative impact on global growth, which could prompt the RBNZ to act preemptively.
UBS, which has maintained a dovish stance throughout this cycle, suggests that the RBNZ should reduce rates to a terminal rate of 3.0%, with the possibility of going below the neutral rate due to the economic slack present in the New Zealand economy.
Initially, UBS anticipated the RBNZ to slow its pace to 25 basis point cuts after dropping below its short-term neutral estimate of approximately 3.75%. This prediction has so far been accurate, and it remains UBS’s base case.
The introduction of U.S. tariffs and the subsequent global growth shock, however, pose downside risks to this view. The RBNZ, known for its proactive measures compared to other central banks, may need to lower rates more aggressively before the full effects of the tariffs become evident.
Central banks, including the RBNZ, the Bank of Canada, and the Reserve Bank of Australia (RBA), have acknowledged that US tariffs are likely to exert downward pressure on interest rates due to their negative impact on growth.
RBNZ Chief Economist Conway has previously stated that tariffs are detrimental to growth, with uncertain effects on inflation. Former Governor Orr added that while tariffs could initially decrease inflation if China were to flood the New Zealand market with goods, they might lead to higher inflation and lower growth in the long run.
UBS concurs with this assessment and notes that while tariffs may lead to inflation in the US, they could cause disinflation in New Zealand, especially if the New Zealand dollar remains stable. Indeed, on the day of the announcement, the NZD/USD exchange rate saw an appreciation.
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