RBNZ Expected to Implement Third Consecutive Jumbo Rate Cut Amid Continuing Inflation Cooling
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The Road Ahead: Will RBNZ Deliver a Third Jumbo Rate Cut as Inflation Remains Cool?
In the world of monetary policy, there’s always an inkling of uncertainty ahead. As the Reserve Bank of New Zealand (RBNZ) prepares to announce its decision on February 19, the air is thick with anticipation. Will they deliver a third jumbo rate cut, or will they keep the status quo? One thing is clear: inflation continues to cool, but domestic pressures persist. In this article, we’ll delve into the numbers, unpack the implications, and explore what lies ahead for Kiwi dollar investors.
Inflation Overshoots but Remains Cool
New Zealand’s consumer price inflation came in marginally higher than expected, with a 0.5% quarter-on-quarter and 2.2% year-on-year increase. While this may seem like a minor overshoot, it’s essential to consider the broader picture. The annual rate remains within striking distance of the RBNZ’s 2% inflation target midpoint. Breaking down the data further, we find non-tradable inflation, which is influenced by domestic factors, has slowed to 4.5% annually, while tradable inflation, driven by international conditions, rose 0.3% for the quarter but declined 1.1% over the year. The old adage holds true: sticky domestic inflation is offset by weak international price pressures.
Core Inflation Remains Stubborn, RBNZ’s Focus
Core inflation, excluding food, household energy, and vehicle fuels, has been a persistent thorn in the side of policymakers. It rose 0.9% for the quarter and 3% annually, leaving it stuck at the top of the RBNZ’s target band. This sluggish progress has left many wondering if the bank will take decisive action to inject more stimulus into the economy. As the old saying goes, "the devil is in the details." We’ll need to see the RBNZ’s preferred measure of underlying inflation, the sectoral factor model, which will be released on Wednesday, to gain a more comprehensive view of the situation.
The RBNZ’s Cash Rate Outlook: Another Jumbo Cut on the Cards?
Market expectations for the RBNZ’s cash rate outlook remain largely unchanged in the wake of the inflation report. Swaps markets now imply a 90% probability of another 50-basis-point cut on February 19, building on the two delivered earlier in the cycle. With more than 100 basis points of cuts still priced in for the remainder of 2025, the RBNZ has a significant window of opportunity to implement further easing. Despite the higher chances of a third jumbo rate cut, some may argue that the bank has already taken a more dovish stance by cutting rates twice previously. However, as the New Zealand economy continues to navigate the choppy waters of international trade tensions and monetary policy uncertainty, a third cut might be the necessary evil to bolster growth and mitigate the risk of a potential recession.
NZD/USD: Bottoming Out or Just a Temporary Reprieve?
The New Zealand dollar’s recent weakness has been a boon for investors seeking to take profits from a disappointing 2020. The currency’s performance has become increasingly influenced by international factors, with its role as a proxy for US trade policy, particularly toward China, playing a significant part in its recent movements. A bullish break of the downtrend dating back to mid-November suggested that recent lows for the kiwi may be in. However, Tuesday’s dip below that level proved unsustainable, and momentum indicators have swung back in favor of the bulls. If NZD/USD can push and hold above 0.5700, it could spark a rapid move toward 0.5774, where the pair briefly stalled before its latest leg lower.
Conclusion: A Recipe for Market Volatility
As the RBNZ prepares to unleash its verdict on February 19, markets will be hanging on every word. One thing’s for certain – the road ahead will be bumpy. With inflation remaining cool but domestic pressures persisting, the RBNZ’s rate decisions will be scrutinized under a microscope. Will they deliver a third jumbo rate cut, or will they take a more measured approach? The answer lies in the belly of the beast, but for now, investors can expect a wild ride. As the dust settles, one thing’s certain – the search for answers will only continue to fuel the fire of market volatility, making the RBNZ’s decisions more crucial than ever. The ball is in their court – let’s see what they have in store for us.
