Welcome Dr Anna Breman!
Dr Anna Breman, the new RBNZ Governor, made an impressive debut before the Finance and Expenditure Committee last week. Governor Breman has hit the ground running. Falling dairy prices need to be watched closely, as downside risk accumulates. GDP partials this week expected to support forecast Q3 bounce. PMI, migration, and tourism data are also due.
More Signs of Economic Recovery
Some MPC members have noted they are not surprised at the market reaction to last week’s MPS. That is important because it suggests the Bank is comfortable with the market direction. New RBNZ Governor Dr Anna Breman starts today. There are more signs of economic recovery. We nudge our Q3 GDP pick up to 0.6% q/q awaiting more ‘partials’ over this week and next. Dairy prices are under downward pressure.
RBNZ to lop another 25 points off its cash rate
Local market attention will this week be centred on Wednesday’s RBNZ Monetary Policy Statement. In short, we see the RBNZ cutting its cash rate a further 25 basis points to 2.25% and leaving the door open to a further reduction in February next year. Q3 retail sales, updates on business and consumer confidence, and October filled jobs are the key data releases but are all scheduled post the RBNZ meeting.
RBNZ November MPS Preview
Our central view is the Reserve Bank cuts the cash rate a further 25 basis points to 2.25% when it presents its November 26 Monetary Policy Statement (MPS). Moreover, we expect the Bank to leave the door open to a further reduction in February next year.
Monitoring progress
Forward looking indicators have been promising some improvement in activity. We will be monitoring the coming week’s data for more signs of the promise translating into actual activity. The NZD has pushed further below RBNZ assumptions raising questions around how fast and far inflation will ease ahead. Inflation expectations data is due for release tomorrow.
Labour market soft, but more signs of life appearing
Wednesday’s Q3 labour market data are expected to show a soft labour market, but with some signs of stabilisation. More monthly economic indicators are showing signs of life supporting our expectation of economic recovery. The RBNZ releases its Financial Stability Report on Wednesday, and the latest Crown accounts are due Thursday.
Q3 Labour Market Preview
We expect next Wednesday’s Q3 labour market data to show a soft labour market, but with some signs of stabilisation. We anticipate minimal employment growth, a nudge higher in the unemployment rate, and easing annual wage inflation. Business and consumer confidence updates are due this week and a few RBNZ speakers are on the circuit.
Inflation at top of the band
Today’s Q3 CPI data came in very close to expectations. It is unlikely to change any views on the outlook for monetary policy. Annual inflation rose to 3.0% from 2.7%, matching market, our, and the RBNZ forecasts. The quarterly details were marginally firmer than expected, but no major surprise. Core inflation is contained, although indicators remain in the top half of the RBNZ’s target band.
Trade tension, growth struggles, and CPI preview
Trade tensions between the US and China have flared again. Locally, the PMI and PSI warn that economic growth is struggling to gain traction. Population growth is slow, reflecting low net inward migration. The 2024/25 fiscal deficit came in narrower than Budget forecasts and Government net debt stabilised as a share of the economy. Q3 CPI seen lifting to 3.0%, subject to this week’s Selected Price Indexes for September. RBNZ’s Conway speaks on Wednesday.
RBNZ to cut
The RBNZ seems certain to cut the OCR at its Monetary Policy Review (MPR) on Wednesday. The question is how much? We see a 25bp cut, although a 50bp move is a clear risk. Economist polls and market pricing also favour a 25bp reduction, with some chance of a 50bp move. Tomorrow’s business survey has the potential to alter thoughts on the economy and outlook for interest rates. The Government Financial Statements for 2024/25 are to be published Thursday. The Minister of Finance speaks Friday.
October MPR Preview
The RBNZ seems certain to cut the OCR at its October Monetary Policy Review (MPR) next Wednesday. The key questions at this juncture are how much further and how fast? We see a 25bp cut in October and a low of 2.50% by year end. Risks are tilted to more easing, depending on the economic recovery. The QSBO is the remaining key release ahead of the MPR meeting. Dr Anna Breman has been announced as the new RBNZ Governor and will start at the Bank on 1 December.
Q3 looks better than Q2
We thought Q2 GDP was going to be weak and so it proved with last week’s data showing a 0.9% q/q contraction. A soft economy supports the case for the RBNZ to take the OCR lower which has long been our forecast. The extent of monetary easing will depend on the pace of economic recovery. A few more indicators support the notion of a Q3 bounce in activity. The QSBO is a key release just ahead of the next RBNZ meeting.
Recession deepens
Leading indicators still suggest the economy is turning the corner but, at the same time, imply that any real momentum is unlikely to develop until the last quarter of this year, at the earliest. Meanwhile, this week’s GDP is likely to deliver confirmation of plenty of spare capacity in the economy justifying the RBNZ’s intention to continue lowering the cash rate.