A preventive discount of 50 bp – ING

The Reserve Bank of New Zealand (RBNZ) announces monetary policy overnight (0200 BST) and both markets and consensus favor a 50bp rate cut. As discussed in our meeting preview, we agree with ING FX analyst Francesco Pesole.

The RBNZ will move rates to neutral at a faster pace

“The RBNZ has to operate with fairly limited information on inflation and the labor market, for which official data is only published quarterly. The only data release since August’s surprise 25bp cut was the second-quarter GDP report, which showed negative growth. This may be enough to add pressure on the RBNZ to move rates to neutral at a faster pace, especially after the Fed’s 50 basis point cut in September.

“A cut of half a point before we see the third quarter inflation numbers obviously requires substantial confidence in the disinflation process. We see high risks of headline CPI falling below 2.0% in the third quarter, which would make the real rate uncomfortably high if the RBNZ does not continue to cut.”

“Markets are pricing in 45bp for this meeting and 91bp overall through the end of the year. We think a 50bp will add more pressure to the underperforming NZD, which could trade closer to 0.61 than 0.62 once we get to the US election risk event.”