RBNZ set for another 50 bps interest rate cut as economic slowdown deepens

• The Reserve Bank of New Zealand is expected to cut its key interest rate by 50 bps to 3.75% on Wednesday.
• The RBNZ's updated forecasts and Governor Orr's words are likely to offer clues on the policy outlook.
• The New Zealand Dollar is set to rock on the RBNZ policy announcements.

The Reserve Bank of New Zealand (RBNZ) is widely expected to lower the Official Cash Rate (OCR) by another 50 basis points (bps) from 4.25% to 3.75% when it announces its interest rate decision on Wednesday at 01:00 GMT.

Most economists polled by Reuters predicted a 50 bps rate reduction at the February policy meeting. The RBNZ has delivered a cumulative 125 bps of cuts since August last year. Therefore, the central bank's hints on future rate cuts could trigger a big reaction in the New Zealand Dollar (NZD).

What to expect from the RBNZ interest rate decision?       

At its November meeting, RBNZ Governor Adrian Orr explicitly anticipated a 50 bps cut this month, noting that "if economic conditions continue to evolve as projected, the committee expects to be able to lower the OCR further early next year."

Orr added that he was "confident domestic inflation pressures will continue to ease."

The decision was backed by concerns over the economic slowdown and inflation returning to the central bank's target range between 1% and 3%. New Zealand's annual Consumer Price Index (CPI) rose 2.2% in the third quarter (Q3) of 2024, aligning with market forecasts and marking a sharp slowdown from the 3.3% growth in the prior quarter.

Since then, New Zealand's economy entered a recession in Q3, with Gross Domestic Product (GDP) declining 1% from the previous quarter's revised 1.1% contraction. Economists expected a 0.4% decrease in the reported period.

Despite its move front-load policy easing in November, the RBNZ maintained that the "economic activity in New Zealand is subdued," leaving room for additional rate cuts this year. 

"The swaps market agrees and sees the policy bottoming near 3.25% over the next 12 months," according to the BBH analysts. This outpaces the Bank's projection of peak OCR in December 2025 at 3.55%.

Against this backdrop, the language of the Monetary Policy Statement (MPS) and the updated economic projections will be key to gauging the scope and timing of future rate reductions.

How will the RBNZ interest decision impact the New Zealand Dollar?

In the lead-up to the RBNZ showdown, the NZD/USD pair is at its highest in four weeks at 0.5750, helped by easing tensions surrounding United States (US) President Donald Trump's tariffs and a broad-based US Dollar (USD) downtrend.

The New Zealand Dollar could reverse sharply from near the monthly peak against the USD if the RBNZ fans further rate cut expectations. Another downward revision to the OCR forecasts could also smash the NZD/USD pair.  

In case the RBNZ hints at slowing its pace of easing or maintains the OCR projections, the NZD could see a fresh upside across the board.

Dhwani Mehta, FXStreet's Senior Analyst, offers a brief technical outlook for trading the New Zealand Dollar on the RBNZ policy announcements: "The upside risks remain intact for the NZD/USD after a Bull Cross was confirmed on the daily chart last Friday. Adding credence to the bearishness, the 14-day Relative Strength Index (RSI) holds well above the 50 level, despite the latest downturn."

"If buyers regain control, the initial resistance is seen at the 21-day Simple Moving Average (SMA) at 0.5814, above which the November 29 2024 high of 0.5930 will be challenged. Further up, the 0.6000 round level will offer stiff resistance. Conversely, strong support is seen near 0.5660, where the 21-day SMA and 50-day SMA hang around. Failure to defend the confluence support could trigger a fresh downside toward the February 3 low of 0.5516," Dhwani adds.