RBNZ set for another 50 bps interest rate cut amid easing inflation and slowing economic activity

• The Reserve Bank of New Zealand is set to lower its key interest rate by 50 bps to 4.25% on Wednesday.
• The RBNZ is expected to front-load due to the economic recession and as inflation falls back into the target band.
• The New Zealand Dollar could see a big reaction to the RBNZ’s updated forecasts and Governor Orr’s press conference.

The Reserve Bank of New Zealand (RBNZ) will announce its interest rate decision on Wednesday at 01:00 GMT. The central bank is widely expected to cut the Official Cash Rate (OCR) by another 50 basis points (bps) from 4.75% to 4.25%.

A Reuters poll of 30 economists found 27 favoring a 50 bps rate reduction at the November policy meeting. The RBNZ cut the OCR by 25 bps during its August meeting and implemented an additional 50 bps reduction in October.

What to expect from the RBNZ interest rate decision?       

Economists expect the RBNZ to front-load rate cuts due to the gloomy economic outlook and as inflation falls back into the central bank’s target range between 1% and 3%.

New Zealand’s economy skirted another recession after Gross Domestic Product (GDP) declined 0.2% in the second quarter (Q2) from the previous quarter’s revised 0.1% growth. Economists expected a 0.4% contraction in the reported period, while the RBNZ projected a 0.5% drop.

Meanwhile, NZ Stats showed on October 16 that New Zealand’s annual Consumer Price Index (CPI) rose 2.2% in Q3, aligning with market forecasts and marking a sharp slowdown from the 3.3% growth in Q2.

By front-loading, the RBNZ can move into less restrictive territory, alleviating the pressures of higher borrowing costs on households and businesses. Following its October meeting, the central bank said in the policy statement that “economic activity in New Zealand is subdued, in part due to restrictive monetary policy.” 

With a 50 bps rate cut fully priced in, markets will pay close attention to the language of the Monetary Policy Statement (MPS) and the updated economic projections for fresh signals on future rate reductions.

How will the RBNZ interest decision impact the New Zealand Dollar?

Another downward revision to the OCR in the updated projections for this year and the next could reaffirm dovish expectations. The RBNZ currently forecasts the OCR at 4.92% in Q4 2024.

In this case, the New Zealand Dollar (NZD) will come under intense selling pressure, with sellers targeting levels unseen since November 2022 around 0.5750

The NZD could rally hard if the RBNZ surprises with a 25 bps rate cut or maintains the OCR forecasts. The NZD/USD could regain 0.5900 and beyond on an unexpected hawkish move. 

Dhwani Mehta, FXStreet’s Senior Analyst, offers a brief technical outlook for trading the New Zealand Dollar on the RBNZ policy announcements: “The downside risks remain intact for the NZD/USD after a Death Cross was confirmed on the daily chart last Friday. Adding credence to the bearishness, the 14-day Relative Strength Index (RSI) stays vulnerable below the 50 level.”

“If buyers defy bearish pressures, the initial resistance is seen at the 21-day Simple Moving Average (SMA) at 0.5920, above which the 0.6000 round level will be tested. Further up, the confluence zone of the 50-day SMA, 100-day SMA and 200-day SMA near 0.6060 will be a tough nut to crack for them. Alternatively, failure to defend the October 2023 low of 0.5772 will threaten the November 2022 low of 0.5741,” Dhwani adds.