RBNZ Review: Begin Cutting
RBNZ cut its cash rate by 25bp to 5.25%
The RBNZ cut its cash rate by 25bp to 5.25% in the August meeting with significant revision in their forecast and expects inflation to return to three percent in September 2024. Some key takeaways:
Policy Change: "New Zealand’s annual consumer price inflation is returning to within the Monetary Policy Committee’s 1 to 3 percent target band." The RBNZ reinforce their view that inflation will continue to tread lower after Q2 CPI came in lower than forecast at 3.3%, shaking off the hot labor report in Q2. They cited "Surveyed inflation expectations, firms’ pricing behaviour, headline inflation, and a variety of core inflation measures" are all aligning with their forecast, which was revised significantly.
Forecast revision: The RBNZ has made significant revision to almost all forecast. The OCR forecast has been revised lower to 4.92% in December 2024 from 5.65% and at 3.85% in December 2025 from 5.14%. The OCR path shows continuous easing until year end 2026 at 3% terminal rate. Q2 2024 CPI has been revised lower to sub-two percent from three percent.
Forward Guidance Change: The forward guidance is changed to "The pace of further easing will depend on the Committee’s confidence that pricing behaviour remain consistent with a low inflation environment, and that inflation expectations are anchored around the 2 percent target." from "The Committee agreed that monetary policy will need to remain restrictive. The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures." The RBNZ is signalling they have exited tightening and entered into the easing cycle. Given the current OCR path, it looks like the RBNZ is expecting to cut rate by 2.25% till 2026, which is almost one every meeting.
The August meeting is a turning point for the RBNZ as they entered the easing cycle. The inflation picture seems to be cooling rapidly in the recent months and prompted the RBNZ to ease earlier than expected. However, the labor market remains red hot and could be a speed bump for RBNZ's smooth cutting plan.