RBNZ: Pencilling deeper cuts - Standard Chartered

Q2 GDP contracted 0.9% q/q, much weaker than both consensus and the RBNZ's -0.3% forecast. Weakness was broad-based across sectors, with construction and manufacturing leading the drag. Markets now expect two further 25bps cuts by the RBNZ, taking the OCR to a 2.50% terminal rate. NZD weakened on the release as markets priced in odds of a larger move at the 8 October meeting, Standard Chartered's economists Bader Al Sarraf and Nicholas Chia report.

When growth forces the hand

"New Zealand's economy lurched back into contraction in Q2, with GDP falling 0.9% q/q (Q1: +0.9%), far weaker than both the Reserve Bank of New Zealand's (RBNZ's) forecast and market expectations of -0.3%. The scale of the decline erases the modest gains in Q1 and underlines a fragile recovery at best."

"The contraction was broad-based, with economic weakness spanning goods-producing industries and parts of services. This surprises us, as we had thought the RBNZ is nearing the end of its easing cycle (see RBNZ - Dovish, but not diving). The 250bps reduction in the official cash rate (OCR) seems to have proven insufficient to offset deteriorating momentum. The data also vindicates the doves within the monetary policy committee at August's meeting, who argued for a more decisive 50bps move."

"The case for further rate cuts is clear amid spare capacity that is widening faster than anticipated and growth momentum undershooting forecasts. We now expect the RBNZ to deliver 25bps cuts in both October and November, taking the OCR to a 2.50% terminal rate. This represents a shift from our prior view of no further easing beyond 3.00%, and reflects the need for policy to move into clearly stimulatory territory as the RBNZ pivots to focus squarely on growth risks."