RBNZ: not done yet

The “Go Big or Go Home” mentality was on display once again in NZ today after the RBNZ delivered an outsized 50bp interest rate cut as it attempts to jolt the stuttering economy back to life. The decision lowers the RBNZ’s official cash rate to 2.5%. This is ~300bps below the peak reached in 2023/24 when the world was fighting the post COVID inflation surge. As our chart shows, outside of the Global Financial Crisis, this is one of the most abrupt policy U-turns in several decades (chart 1). And in our opinion, the RBNZ may not be done yet.

Ahead of the decision traders and economists were evenly split as to whether the RBNZ would deliver a standard 25bp interest rate reduction or a more aggressive step. In the end, the weakness in NZ’s economy, which has contracted in three of the past five quarters, and excess slack that has built up were issues too big for policymakers to ignore (chart 2). Today’s move puts the level of interest rates in NZ into “accommodative” territory, and there is scope for additional policy easing with the RBNZ noting the “committee remains open to further reductions” to help inflation settle around target over the medium-term (chart 3).

Given the lingering downside risks across the NZ economy, upswing in unemployment, and cooling domestic price pressures we believe another 25bp interest rate cut at the next meeting in late November is more likely than not (chart 4). We feel this could also give new RBNZ Governor Breman a cleaner operating slate when she kicks off her tenure in December.

The downward adjustment in NZ interest rates on the back of the ‘surprise’ RBNZ decision has exerted more downward pressure on the NZD. At ~$0.5750 the NZD is tracking near the bottom end of the range it has occupied since mid-April. Our ‘fair value’ model estimate suggests NZD/USD might be a bit undervalued at present, however we doubt it has scope to rebound quickly or aggressively for a while given the headwinds created by the ‘dovish’ RBNZ stance, still shaky global/Asian economic growth, and USD support generated by the upturn in USD/JPY and EUR weakness stemming from political changes in Japan and France (chart 5).

Moreover, we think the NZD can continue to struggle on the cross-rates, particularly versus the AUD. AUD/NZD has risen to levels last traded in Q4 2022 (now ~1.1425, NZD/AUD has fallen to ~0.8753) with relative economic and interest rate trends firmly in Australia’s favour, in our opinion. Our modelling suggests AUD/NZD has more upside potential (NZD/AUD more downside) with our estimated ‘fair value’ sitting closer to ~1.16 (or ~0.8621 for NZD/AUD) (chart 6). Note it has been almost 12-years since AUD/NZD traded north of 1.15 (NZD/AUD sub ~0.87).

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com