NEW Zealand’s central bank will debate whether to cut interest rates by 25 or 50 basis points in February, a senior central banker said on Thursday (Nov 28), after having disappointed doves in the market who had wagered on a super-sized 75 bp move this week.
Reserve Bank of New Zealand (RBNZ) assistant governor Karen Silk said the central bank did not consider the case for a 75 bp cut because there was still work to do to bring down domestic inflation.
Headline inflation slowed to 2.2 per cent in the September quarter, back in the target band of 1 to 3 per cent, driven by a sharp decline in tradeable inflation, which the RBNZ expects to pick up to its historical average. Non-tradeable inflation, mostly homegrown price pressures, stayed high at 4.9 per cent.
“If we drive all the way back to neutral now, it creates the additional risk that you won’t get domestic inflation down,” said Silk. “We have to make sure core inflation is also sustainably back at the target mid-point.”
The RBNZ chopped its cash rate by 50 basis points to 4.25 per cent on Wednesday, marking 125 bps of easing in just four months. Economists had overwhelmingly tipped a half-point move, but markets had priced in around a 40 per cent chance for a whopping 75 bps cut.
That led markets to scale back the probability of another 50 bps in February to 32 per cent, even though RBNZ governor Adrian Orr sounded open to such a move.
Silk said the central bank’s rate projections do not suggest 100 per cent weighting on either a 25 or a 50 bps move, but policymakers would debate the merits of both options in February. REUTERS
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