- RBNZ tipped to hold but a cut is possible given low inflation
- Weak China, other external headwinds raise pressure for easing
- RBNZ's bill forecasts likely to show 2 more cuts this year
New Zealand's central bank is expected to keep rates on hold next week, but a cut wouldn't come as a complete surprise given slowing growth, global deflationary pressures and a cooling China have many analysts predicting an easing in the second quarter.
While the $165 billion Pacific economy continues to grow at a decent clip of close to 2.5 percent, the stiff external headwinds that have prompted the likes of the Bank of Japan and European Central Bank to adopt negative interest rates are also making life hard for New Zealand policy makers.
Tumbling commodity prices have crunched earnings of the nation's key dairy exports and left domestic inflation well below the Reserve Bank of New Zealand's 1 to 3 percent target band. A slowdown in major trading partner China and global markets turbulence have kept up the pressure for more policy easings.
"The world has huge problems to manage at present," said ANZ bank chief economist Cameron Bagrie. "Price action is poor. China is front and centre, and their economic problems will be exported. Moreover, it would be heroic to assume broader global issues will just go away."
Nine of 12 economists - including ANZ - polled by Reuters expect the RBNZ to hold rates at the current record-low 2.50 percent on Thursday. The rest expect a quarter point cut. The majority, however, predict rates to be at 2.25 percent by the end of the second quarter. [NZ/POLL]
Money markets are pricing in a 28 percent chance of a cut next week, and are fully priced for an easing in June.
RBNZ Governor Graeme Wheeler cut the benchmark rate four times last year and has said further reductions may be needed given the low inflation backdrop.
Markets are also wagering the U.S. Federal Reserve will struggle to hike rates much further this year, helping the New Zealand dollar bounce and dampening imported pricing pressures.
Economists are now expecting the NZ central bank to rejig its 90-day bank bill forecasts at Thursday's meeting - widely considered a proxy for interest rates - to show another two rate cuts this year.
Consumer prices are currently running at 0.1 percent and inflation expectations have tumbled, taking the shine off other areas in the economy including strong housing and a tourism boom.
And the usual salutary effects of strong net migration gains have also thrown up another challenge - suppressed wages closing down a route to inflation.
"The low inflation challenge is getting bigger," said HSBC Australia and New Zealand Chief Economist Paul Bloxham.
"The RBNZ is likely to stay on hold for now, but we expect it to signal an increased likelihood of more cuts to come."
($1 = 1.4841 New Zealand dollars)
