The New Zealand Dollar Hits the Deck as Economists Forecast RBNZ Rate Cut Response to Dire GDP Data

Image © Rafael Ben-Ari, Adobe Images

- NZD hammered after GDP miss reignites speculation of RBNZ rate cut.

- Economy grows 0.3% in Q3, less than half the RBNZ's latest forecast.

- Denting inflation outlook and leading ANZ to project cash rate cut to 1%. 

The New Zealand Dollar fell back toward its 2018 low during the overnight session Thursday after official data revealed the economy grew at its slowest pace for three years in the third-quarter. 

This week's disappointing growth data is now fuelling fresh speculation the Reserve Bank of New Zealand (RBNZ) could be compelled to cut its interest rate once into 2019, which has further undermined the Kiwi currency.

New Zealand's economy grew by just 0.3% during the third quarter, down from 1% previously, which was beneath the consensus for growth of 0.6% and below all economist forecasts.

That is the weakest quarterly number for three years and was enough to drag the annual pace of growth down to 2.6% for the year ending in September, from a revised 3.2% for the second quarter.

"We expect growth can continue to muddle along at an annual pace of 2½-3%, as a number of economic headwinds and tailwinds play out. This would be a touch shy of where we see trend growth, suggesting it will be a struggle for core inflation to lift sustainably to the RBNZ’s 2% target," says Sharon Zollner, chief economist at Australia & New Zealand Banking Group (ANZ).

Third-quarter growth was also less than half the rate forecast by the RBNZ just a few months ago, placing a question market over whether Kiwi inflation will ever return to the upper end of the 1%-to-3% inflation target band.

The RBNZ had already warned in August it will cut interest rates if the growth outlook does not improve during the second half of the year, which is why markets are now contemplating the cash rate outlook.

Zollner says the ANZ team are now forecasting an interest rate cut of 25 basis points, taking the cash rate down to 1.5%, in November next year. She also says that will be followed by two more rate cuts in 2020. 

"The RBNZ will conclude that a stronger growth rate is required in the future to see CPI inflation return sustainably to target. We don’t see that happening without further monetary stimulus. In short, growth is now decelerating from its revised rate of around 3½% at the end of last year (previously estimated to be around 3%), and yet core inflation remains well south of where it needs to be," Zollner writes to clients, Thursday.

Above: NZD/USD rate shown at daily intervals.

The NZD/USD rate was -0.45% lower at 0.6744 Thursday after falling more than 100 points overnight, and is now down by -4.7% for 2018.

The Pound-to-Kiwi rate was 0.76% higher at 1.8774 Thursday but has fallen -1.1% in 2018. The AUD/NZD rate was -0.04% higher at 1.0549 and has dropped -4.5% in 2018.

The GDP data and subsequent price action came in the wake of December's Federal Reserve (Fed) interest rate statement and economic forecasts, which drove the U.S. Dollar higher overnight.

Above: Pound-to-New-Zealand-Dollar rate shown at daily intervals.

The Reserve Bank of New Zealand has held its cash rate at a record low of 1.75% ever since November 2016, and pricing in interest rate derivative markets had suggested it would be 2020 before rates were raised.

"TD expects the OCR to remain at 1.75% through to November 2019, with risks of slippage into 2020 if the Governor insists on keeping the cash rate unchanged through 2019 and 2020 no matter what the data outcomes are," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities.

This lower-for-longer stance has prevailed at the RBNZ at a time when other central banks are lifting their interest rates.

That has turned the gap or spread between yields on Kiwi government bonds and their international counterparts against the New Zealand Dollar, dealing a crushing blow to the currency. 

The trade war further hurt market hopes for the Reserve Bank of New Zealand RBNZ cash rate because of the impact it had on expectations for growth, and because it also drove the U.S. Dollar higher.

However, all of those downward pressures could easily escalate in the months ahead if the more analysts and economists come around to the idea that the RBNZ could soon begin cutting rates rather than raising them.

"Over this year, NZD has fallen by -4.5%, outperforming neighbour AUD (-8.9%) despite the market-busting surprise RBNZ rate cut scenario introduced in August. Since then, the FX market doesn't believe that a rate cut is likely (chart right) although the rates market still hasn't completely ruled out the possibility," says Beacher. 

Changes in interest rates are normally only made in response to movements in inflation but impact currencies through the push and pull influence they have on capital flows as well as their allure for traders.

Kiwi inflation has been running beneath the midpoint of the RBNZ's 1%-to-3% target band for a number of years now. Faster economic growth is a prerequisite for a sustainable return toward levels more acceptable to the RBNZ. 


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