On Monday, HSBC (LON:) Global Research adjusted its forecast for the Reserve Bank of New Zealand (RBNZ), anticipating more aggressive interest rate cuts in the upcoming months due to signs of a slowing economy.
The bank now expects the RBNZ to lower its cash rate by 50 basis points (bp) in both October and November, a change from its previous prediction of 25bp cuts in each of the two months.
The revision comes after the Quarterly Survey of Business Opinion (QSBO) indicated excess capacity within the economy and easing price pressures, suggesting firms are struggling to pass on higher costs to consumers. This aligns with the RBNZ’s pivot to an easing stance at its August meeting, where it reduced the cash rate by 25bp to 5.25%, marking a departure from earlier hawkish guidance.
“The key data point this week was the Q3 Quarterly Survey of Business Opinion (QSBO) which highlighted that excess capacity is persisting and that weak demand is the key concern facing businesses. Critically, it also showed easing price pressures, with businesses reporting that they are now unable to pass higher input costs on to higher prices,” said the analysts.
“This, combined with the monthly ‘selected price indices’ – a partial,
timelier read on CPI – point to further disinflation in Q3, with headline CPI inflation likely to be comfortably back in the RBNZ’s 1-3% target band.”
The economic backdrop for the RBNZ’s potential rate cuts includes a contraction in GDP for the second quarter, a cooling jobs market, and subdued consumer and business confidence. Despite some improvements in near-term indicators, overall demand remains weak in the third quarter.
HSBC’s expectation of a 50bp rate cut in October would bring the RBNZ’s cash rate down from 5.25% to 4.75%. However, the firm acknowledges that there is significant uncertainty regarding the RBNZ’s decision-making, given the central bank’s rapid shift from a hawkish to a more accommodative approach earlier this year.
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