New Zealand Interest Rate Outlook – Will the RBNZ Cut the Cash Rate?

By Mike Houlahan, Senior Foreign Exchange Dealer

Auckland, NZ

After a long period of stability on the interest rate front - the Official Cash Rate (OCR) has remained unchanged at 1.75% since late 2016 – it looks like interest rates are heading downwards again.

A combination of slowing growth both domestically and a slowdown in international growth point to lower interest rates. The trade war between the USA and China looks to have weighed on global growth and most Central Banks have moved to an easing bias. We think our own Reserve Bank of New Zealand (RBNZ) will be the next to move to a softer stance. The next OCR Review is Wednesday, 27 March.

The domestic economy grew less than expected in 2018 at just 2.3% year on year to December. Looking ahead to 2019 and 2020, the slowdown in the household sector looks to be a drag on growth going forward. It looks like growth will be closer to 2.0% going forward rather than the 3.0% the RBNZ had forecast previously.

Construction has been a big contributor to growth over the last few years as rising house prices have encouraged greater investment in both residential and commercial property. Looking ahead though, housing now faces some major headwinds including:

• The ban on foreign buyers

• Banks having to hold more capital

• Falling migration numbers

• Proposed Capital Gains Tax

As a result, we expect the RBNZ to signal that rate cuts are on the way.

At present the currency markets are not factoring in the chance of rate cuts this year by the RBNZ and so a move towards an easing bias could see downward pressure on the NZ Dollar.

When the RBNZ last cut rates back in 2015/16 the NZDUSD rate tumbled from 0.8800 to 0.6300. We don’t expect as big a fall this time but a move back towards 0.6000 looks to be on the cards.

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