RBNZ cuts 50bps, signals higher neutral estimate; NZD/USD surges as rate cut slowdown looms

• RBNZ cuts 50bps to 4.25%, with no debate on a larger move
• NZD/USD surges as only 25bps or 50bps were considered.
• Neutral rate revised higher, indicating shallower easing cycle
• NZD/USD threatens to break downtrend resistance; directional risks skewing higher?
• RBNZ governor Adrian Orr to speak at 3pm Wellington time (1pm AEDT)

Overview

The Reserve Bank of New Zealand (RBNZ) cut interest rates by 50 basis points to 4.25% in November, taking the consensus option despite markets flirting with the idea of an even larger 75 basis point move. With markets pricing 57 basis points of cuts for the meeting, NZD/USD has bounced on the decision, aided by the revelation that only a 25 or 50-point cut was debated. However, movements beyond the next few hours are more likely to be driven by sentiment towards the US dollar, especially the US interest rate outlook.

Big cut that could have been bigger

Explaining the decision, the RBNZ said the economy remained "subdued and output continues to be below its potential," leading to inflation pressures having "eased." 

"Domestic price and wage setting behaviours are becoming consistent with inflation remaining near the target midpoint," it said. 

Despite forecasting a string of rate cuts next year, an 84-day gap between the next rate decision and persistent weakness in the economy, the board opted against being even more aggressive, unwilling to take the opportunity to deliver a larger cut despite markets pricing around a 25% chance of a 75bps move.

Hawkish tilt despite jumbo rate cut

Not only did that not happen, it wasn’t even considered with RBNZ governor Adrian Orr acknowledging it was not debated among board members. 

“The Committee agreed that a 50 basis point cut is consistent with their mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates and the exchange rate," minutes of the meeting noted. "If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.”

Source: RBNZ

While the RBNZ expects to continue cutting rates next year, there was a hawkish tilt to its updated cash rate forecast track with its neutral estimate nudged up a touch, rising from slightly below 3% to marginally above. The neutral level is where policy is deemed neither stimulatory nor restrictive for the inflation outlook. It's a dynamic rate, meaning it is constantly evolving.  

Along with the acknowledgement only a 25 or 50-point move was discussed, it explains why New Zealand short-term interest rates and NZD/USD have popped higher since the decision. 

Key interest rate gains sharply

Source: Refinitv

Two-year swaps – which are an important mechanism for policy transmission as they are the rate many New Zealand mortgages are priced off – have added around 12bps, effectively stripping half a cut out of the profile.

NZD/USD threatening key resistance 

Source: TradingView

The uplift in interest rates may also alter the technical picture for NZD/USD which is attempting to break downtrend resistance dating back to the highs set in September. RSI (14) and MACD have both generated bullish signals, improving the likelihood of the move sticking.

If the downtrend breaks, .5912 is the first topside target. Beyond that, there’s not a lot of visible resistance until .6053, with only minor levels such as .5950, and .6040 in between.

However, as covered in recent NZD/USD analysis, it’s the US rate outlook that has been heavily influencing moves recently. On that note, recent developments suggest we may have seen a near-term high for US bond yields, potentially skewing directional risks for NZD/USD higher should the downtrend buckle.

-- Written by David Scutt

Follow David on Twitter @scutty