WELLINGTON (Reuters) - New Zealand’s central bank is expected to hold interest rates steady on Wednesday, but keep the door open for further easing to support growth in the face of slowing external demand and broadening global pressure from a heated Sino-U.S. trade war.
The Reserve Bank of New Zealand (RBNZ), which cut the cash rate by 25 basis points to a record-low 1.50% in May, the first reduction in more than two years, is expected by all 15 economists polled by Reuters to pause at this week’s meeting to assess conditions.
However, RBNZ Governor Adrian Orr isn’t expected to hold fire for too long, with most economists predicting a second cut in borrowing costs at the next rates review in August - a dovish shift in monetary policy that many global central banks have embraced recently to fight trade and growth pressure.
Last week, both the U.S. Federal Reserve and the European Central Bank reversed course and opened the door to new stimulus, while the Reserve Bank of Australia (RBA) has said it’s likely to ease again to follow up from its cut earlier this month.
Markets are ascribing a 31 percent chance of an RBNZ rate cut this week, and are almost fully priced for a reduction in August.
“We believe that the current stimulus will not be enough to bring core inflation back to target. The RBNZ will therefore have to lower rates again before the year is out,” analysts at Capital Economics wrote in a note to clients.
With inflation still stubbornly low, and below the midpoint of the RBNZ’s 1-3 percent target band, analysts say stronger first quarter headline gross domestic product (GDP) growth figures released last week should only provide a modicum of relief to policymakers.
The Treasury department last month cut its GDP growth forecast to 2.1% for the 12-months ending June 30, from the 2.9% expansion predicted in December.
Moreover, analysts and governor Orr have cautioned that slowing immigration and housing leave New Zealand vulnerable to rising global risks.
“Although we are optimistic on the domestic economy over the coming year, we doubt that signs of a domestic upturn will be sufficient by August to offset the RBNZ’s global worries,” said Westpac’s Dominick Stephens, who has penciled in a rate cut in August.
Editing by Shri Navaratnam