Baked Into The Cake, We Await Another Rate Cut. RBNZ To Deliver 25bps

• Following a trio of 50bps rate cuts, we expect the RBNZ to slow its pace of easing next week. We expect a 25bp cut to bring the cash rate to 3.50%.
• The Kiwi economy is crawling out of recession. Policy should be set to get the economy back on its feet and running in the right direction. The RBNZ has delivered 175bp of easing in a relatively short period. But more is still needed.
• A 25bp cut in April is “baked into the cake” so to speak. The rates market is perfectly priced, so we’re unlikely to see much reaction. And if rates won’t react, then neither should the currency. It’s offshore developments, namely tariff volatility (and confusion), that’s moving markets.

A 25bp rate cut at the April meeting is “baked into the cake” so to speak. The cake is still sour, not yet sweet. Monetary policy is still restrictive, far from stimulatory. We have recorded a deep, prolonged, and painful recession. Interest rates should be at a neutral setting, around 3%, at least. And a good argument is being made for a slightly stimulatory position, around 2.5%. We are crawling out of this recession. Policy should be set to get the economy back on its feet and running in the right direction.

When it comes to possible reactions in financial markets, we don’t think we'll get much at all. The rates market is perfectly priced in our opinion. The swap rate curve has the cash rate falling to 3%, in line with our call and the RBNZ's own OCR track. And a 25bp rate cut to 3.5% in April is 95% priced. So bang on. The May meeting needs a little more convincing, with an 80% chance of a follow up cut to 3.25%. This is a very long way of saying, the rates market probably won’t react much. And if rates won’t react, then we don’t think the currency will do much either.

Between escalating geopolitical tensions and growing risk of geoeconomic fragmentation, the global outlook is shrouded in uncertainty. Fears of a global growth slowdown are building given the level and scope of the tariffs proposed. Confusion still surrounds the newly announced US reciprocal tariffs, but first impressions are that they’re on the rather aggressive side of expectations. NZ may be getting off relatively lightly, with the blanket 10% tariff applied. But a heavier hand was dealt on China (54%) and other Southeast Asian countries.

Like its peers, we expect the RBNZ to acknowledge these global risks. The beginnings of our economic recovery – as fragile as it is – has largely been driven by the external sector. A disruption to global trade does not bode well for the Kiwi ‘small, open’ economy. An escalation of the tariff trade war, should countries retaliate, could stall our expected economic recovery. And such a scenario would require the RBNZ to push the cash rate below 3%.

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