4 Reasons Why the RBNZ Might Cut Interest Rates Soon

Looking back at the goings-on in New Zealand almost exactly a year ago suggests that history may be about to repeat itself with another RBNZ rate cut in June. Here are a few reasons why RBNZ head Wheeler and his fellow policymakers might lower their benchmark rate next month:

1. Housing market controls

In their latest monetary policy statement, RBNZ policymakers pretty much admitted that the main factor preventing them from lowering rates is the potential property bubble in Auckland. Slashing lending rates would make mortgages more affordable, thereby stoking speculative demand and housing inflation, prompting officials to worry about an overheating market.

According to Finance Minister Bill English, the central bank might have to take some action if they believe that lending activity is already taking off. In particular, he’s referring to measures that could curb mortgage demand such as tighter loan-to-value ratio (LVR) controls or other macro-prudential tools. This comes before the release of the RBNZ Financial Stability Report, which was used by the central bank to disclose details on loan restrictions before cutting rates last year.

2. Weak wage inflation

In terms of economic data, the numbers haven’t been all that bad but there are still several weak spots. For instance, the quarterly jobs release showed a stronger than expected 1.2% gain in hiring and a pickup in labor force participation, but the underlying data revealed a slowdown in wage growth.

The labor cost index printed a meager 0.4% uptick for the quarter, translating to a 1.6% year-over-year gain, underscoring the RBNZ’s view that the growing workforce from rising migration doesn’t give companies an incentive to offer competitive wages. In turn, this could further dampen consumer inflation, which is simply being propped up by higher house prices lately.

3. Downbeat Chinese imports

Another factor that could push the RBNZ to pull the rate cut trigger soon is the nonstop decline in Chinese imports. While the headline trade balance showed a wider than expected surplus, underlying data showed a jaw-dropping 10.9% slump in imports, which have been declining for the past 18 months.

Slowing manufacturing activity as indicated by weaker PMI readings could continue to weigh on China’s appetite for commodities, particularly when it comes to iron ore and copper products from Australia, which is New Zealand’s closest trade buddy.

4. Another dairy industry downturn?

Being the world’s second largest economy makes China one of the top consumers of products from all over the globe, and that includes New Zealand’s dairy goods. It has been observed that demand from China has been one of the main factors influencing New Zealand’s trade numbers so another round of weakness could weigh on dairy exports.

It doesn’t help that dairy prices are having trouble rebounding, as the latest GDT auction indicated that the industry has been unable to continue its positive streak. The GDT index showed a 1.4% decline last week, following back-to-back gains of 2.1% and 3.8%. Keep in mind that the dairy industry accounts for nearly a third of overall economic activity in New Zealand so another potential slowdown could warrant additional stimulus.

Now the RBNZ isn’t set to make its next policy announcement until June 8, but forex junkies appear to be pricing in easing expectations early on. And based on a few central bank decisions, these speculations tend to yield more prolonged moves than the announcement itself. Do you think the Kiwi will keep dropping from here?