• The Reserve Bank of New Zealand is expected to cut interest rates by 50 bps to 4.75% on Wednesday.
• New Zealand’s deepening economic downturn and inflation optimism flag outsized RBNZ rate cut bets.
• The RBNZ policy announcements are set to inject intense volatility into the New Zealand Dollar.

The Reserve Bank of New Zealand (RBNZ) is set to follow the US Federal Reserve’s (Fed) footsteps when it announces its interest rate decision on Wednesday at 01:00 GMT.

New Zealand’s central bank will not publish the quarterly economic projections alongside its policy statement. There will be no press conference from Governor Adrian Orr to follow.

What to expect from the RBNZ interest rate decision?       

The RBNZ is widely expected to lower the Official Cash Rate (OCR) by 50 basis points (bps) from 5.25% to 4.75% following its October monetary policy meeting. The central bank delivered a surprise 25 bps rate cut back in August.

Since then there has been no piece of new macro news, except for New Zealand’s June quarter Gross Domestic Product (GDP) report. Data released by Statistics New Zealand on September 19 showed that GDP declined 0.2% in Q2 from the previous quarter’s revised 0.1% growth. Economists expected a 0.4% contraction in the reported period, while the RBNZ projected a 0.5% drop.

Despite a smaller-than-expected GDP contraction in Q2, the declining trend in inflation and slowing economic activity help build a case around a potential 50 bps cut by the RBNZ this week. However, New Zealand’s sticky non-tradable inflation and a strong resurgence in business confidence could lead the RBNZ to opt for a smaller rate reduction in November.