RBNZ Anticipated to Reduce Interest Rates by 50 Basis Points Amidst Falling Inflation and Economic Slowdown

The Reserve Bank of New Zealand (RBNZ) is poised to announce a significant interest rate cut of 50 basis points (bps), reducing the Official Cash Rate (OCR) from 5.25% to 4.75% during its upcoming meeting on Wednesday at 01:00 GMT. This decision is expected to create considerable volatility in the New Zealand Dollar (NZD).

Following in the footsteps of the US Federal Reserve, the RBNZ will not release its quarterly economic projections alongside the policy statement, nor will there be a press conference led by Governor Adrian Orr.

The anticipated cut comes after a surprise 25 bps reduction in August, and recent economic indicators suggest a need for further easing. The latest Gross Domestic Product (GDP) data, released by Statistics New Zealand on September 19, revealed a 0.2% contraction in Q2, contrasting with the previous quarter's revised growth of 0.1%. This decline was less severe than the 0.4% contraction economists had forecasted, and the RBNZ's own prediction of a 0.5% drop.

Despite the smaller-than-expected GDP contraction, the ongoing decline in inflation and slowing economic activity support the case for a 50 bps cut this week. However, persistent non-tradable inflation and a resurgence in business confidence may lead the RBNZ to consider a smaller rate reduction in November.

FX Strategists at ING highlighted that the RBNZ's latest projections indicate a headline Consumer Price Index (CPI) of 2.3% and a non-tradable CPI of 5.1% for Q3. They noted, "There’s a non-negligible risk that inflation has dipped below the midpoint of the 2% target range, but non-tradable CPI is likely to remain sticky. Thus, this 50 bps cut may be a one-off, with the RBNZ reverting to 25 bps reductions towards a terminal rate near 3%."

As the market prepares for the RBNZ's announcement, the NZD is trading near its lowest level in a month against the US Dollar (USD), hovering around 0.6100. This comes as the USD remains strong, bolstered by robust September Nonfarm Payrolls (NFP) data that have led markets to dismiss the possibility of a significant Fed rate cut in November.

The NZD/USD pair faces two-way risks heading into the RBNZ's policy announcement, with its future direction dependent on the central bank's communication regarding the magnitude and pace of future rate cuts. If the RBNZ proceeds with the expected 50 bps cut but adopts a cautious tone in its statement, it could bolster demand for the NZD. In such a scenario, the NZD/USD might rebound towards the 0.6300 level. Conversely, a surprise 25 bps cut could also attract NZD buyers.

On the flip side, if the RBNZ acknowledges progress in disinflation while expressing concerns about economic challenges, this could lead to a renewed downtrend for the NZD/USD, potentially pushing it towards 0.6000.

Dhwani Mehta, FXStreet’s Senior Analyst, provided a technical outlook for trading the New Zealand Dollar in light of the RBNZ's policy announcements. He noted, "The NZD/USD pair is currently testing the critical 200-day Simple Moving Average (SMA) at 0.6099, with the 14-day Relative Strength Index (RSI) in bearish territory. If buyers can defend this key level, a recovery towards the 21-day SMA at 0.6226 could ensue, with the 50-day SMA at 0.6157 also coming into play. Conversely, a sustained break below the 200-day SMA could trigger a fresh downtrend towards the 0.6000 level, where the August 16 low at 0.5978 may be tested."