Shock and Orr - RBNZ surprises with a 50bps cut

Today the RBNZ shocked markets with a 50bps cut to the official cash rate, bringing it down to 1.00% from 1.50%. There were no economists forecasting a 50bps cut, the market consensus expected a 25bps cut, and some analysts were even expecting no change in the policy rate.

The unexpectedly large move surprised markets, the RBNZ have only every cut the cash rate 50bps or more 3 times previously - post the 9/11 terrorist attack, in the midst of the GFC, and following the Christchurch earthquake.

However, the RBNZ do have a reputation for “leading the pack” in pioneering monetary policy, New Zealand was the first country in the world to adopt a formal inflation target in 1989. The move today is likely a reflection of a central bank running low on ammunition, moving hard and fast in an attempt to get ahead of the curve and maximise the impact of the limited bullets. Rather than chase the proverbial tail and follow the market.

Governor Orr highlights today that global conditions are deteriorating and headwinds for the NZ economy are mounting, "GDP growth has slowed over the past year and growth headwinds are rising," he said. "In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets."

The RBNZ also left the door open for continued easing, accompanying the decision with more dovish commentary and citing nothing is ruled out for the future. This openness to further easing measures, and the obvious intent to stay ahead of the curve coupled with an external environment where risks are mounting likely means further easing from the RBNZ is on the cards.

Today’s move sent the NZD and the AUD tumbling, with the AUD breaching January’s flash crash lows and hitting the lowest level since 2009.

The AUD sliding as the unexpectedly large move from the RBNZ has market participants ramping up bets that the RBA may move to cut the cash rate sooner than previously thought. We continue to expect further easing from the RBA and maintain that the terminal rate for the RBA this cycle is likely to be sub 1% at 50bps by Q1 next year, but the risk is this comes sooner - end of 2019. There is sizable spare capacity remaining in the economy and it is likely labour demand will soften in coming months given persistent below trend growth, the external risks remain high and this will only add to the slowing growth environment. Labour market slack needs to be reduced substantially before wages, the largest component of household incomes, can rise and take the pressure off debt laden households. Unemployment at 5.24% remains well above the RBAs updated NAIRU estimate of 4.5%, thus preventing material upward pressure on wages and prices needed for the RBA to meet their inflation target. The RBA have outlined they will use monetary policy in order to achieve their objectives and the case for continued rate cuts remains.