BofA Global Research Fund Manager Survey: Global Investors Buy Bonds on Declining Global Growth Expectations

Economic

Summary:

US Recession Concern Top Tail Risk .Sixty percent of Managers Expect Four Or More Fed Cuts in Next 12 Months

Global investors made a beeline into bonds in July, driven by declining world growth expectations, according to BofA Global Research’s monthly fund manager survey, released Wednesday.

Jitters about the U.S. economy were at the forefront of these concerns, the survey said.

In August, a net 47% of portfolio managers looked for weaker economic growth in the coming year. This compared to a net 27% in July and a net 6% in June. This is in sharp contrast to April when a net 11% of managers looked for stronger world growth.

Inflation concerns abated further month, with a net 76% of investors looking for lower CPI in the next 12 months versus a net 62% in July and a net 57% in June.

In August, 60% of those polled looked for four or more rate cuts from the Federal Reserve in the coming 12 months. This month, 94% looked for the first cut at the Sept. 18 FOMC meeting versus 87% with that view in July.

“Core optimism” about a “soft landing” in the U.S. economy was unchanged this month, “but investors now expect a greater degree of Fed policy easing in the next 12 months will be required to achieve this outcome,” the survey said.

In terms of asset allocation, for the second month global investors pared back riskier assets and moved monies to more stable instruments.

In August, a net 11% of portfolio managers were overweight global equities, compared to a net 33% overweight in July and a net 39% overweight in June.

A net 8% of managers were overweight bonds this month, compared to a net 9% underweight in July and a net 17% underweight in June.

In August, commodity holdings fell to a net 7% underweight. This compared to a net 1% underweight in July and a net 6% overweight in June.

Allocation to real estate stood at a net 28% underweight, little changed from the net 29% underweight seen in July and still softer than the net 23% underweight seen in June.

Average cash balances rose to 4.3% in August compared to 4.1% in July and 4.0% in June. Allocation to cash held at a net 6% overweight this month, compared to a net 1% underweight in July and a net 6% underweight in June.

This month, all regional asset allocations saw outflows.

Allocation to U.S. equities fell to a net 11% overweight in August from a net 16% overweight in July. This compared to a net 7% overweight in June.

This month, a net 4% of managers were overweight eurozone stocks. This compared to a net 10% overweight in July and a net 30% overweight in June.

Allocation to global emerging markets (GEM) stood at a net 3% overweight in August. This compared to a net 9% overweight in July and a net 1% overweight in June.

This month, allocation to Japanese equities fell to a net 9% underweight from a 7% overweight in July, while UK allocation slipped to a net 8% underweight from a net 4% underweight last month.

In August, the biggest “tail risks” feared by portfolio managers were: “US Recession” (39% of those polled), “Geopolitical conflict” (25%), “Higher Inflation” (12%), “Systemic credit event” (11%), “AI bubble” (7%), and “US election ‘sweep’ (4%).

In July, the biggest “tail risks” were: “Geopolitical conflict” (26% of those polled), “Higher inflation” (22%), “US Recession/Hard Landing” (18%), “AI bubble” (12%), “US election ‘sweep’” (12%), and “Systemic credit event” (7%).

In August, the top three “most overcrowded” trades were deemed “Long Magnificent Seven” (53% of those polled), “Short China equities” (15%) and “Short Japanese Yen” (12%)

In July, the “most overcrowded” trades were: “Long Magnificent Seven” (71% of those polled), “Short Japanese yen” (12%), and (tied for third place) “Short China equities” (5%) vs “Short small cap stocks” (5%).

Note: the term “Magnificent Seven” was coined by Bank of America’s chief investment strategist Michael Hartnett, referring to a basket of the seven major tech stocks: Apple, Microsoft, Amazon, NVIDIA, Alphabet, Tesla and Meta.

An overall total of 220 panelists, with $590 billion in assets under management, participated in the BofA Global Research fund manager survey, taken August 2 to August 8, 2024. “189 participants with $508bn AUM responded to the Global FMS questions and 122 participants with $265bn AUM responded to the Regional FMS questions,” BofA Global said.

Source: MaceNews

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Cohen

Economic

Financial markets are flashing a higher probability of an oncoming recession in the wake of the market maelstrom that briefly sparked fear across Wall Street last week.

It still remains an outside chance. But models from Goldman Sachs Group Inc and JPMorgan Chase & Co show that the market-implied odds of an economic downturn have risen materially, judging by signals in the US bond market and to a lesser extent the performance of stocks that are acutely sensitive to the ebbs and flows of the business cycle.

Together equity and bond markets are assigning a 41% probability to a US recession, up from 29% in April, according to Goldman, with the latest jump driven by the market wagering on a more aggressive pace of rate cuts from the Federal Reserve (Fed) and the lagging performance of stocks that are acutely sensitive to the ebbs and flows of the business cycle. A similar model by JPMorgan calculates the odds to be 31%, jumping from 20% since the end of March, due to the sharp repricing in US Treasuries.

JPMorgan strategist Nikolaos Panigirtzoglou said the recession risk in the bank's model reflects the scale of rate cuts that have been priced in since the employment report showed a slowdown in job growth last month. He said the stock market signals just a one-in-five chance of a recession, albeit up from the zero that was priced in when equities were rallying to fresh records earlier this year.

"US credit and equity markets look disconnected from US rate markets," he said. "If the next US household survey for the month of August is similarly weak to the July one, reinforcing the recession thesis, equity and credit markets would need to weaken significantly to catch up with rate markets."

The weaker-than-expected job-growth figures on Aug 2 raised concerns of a slowdown by fanning fears the Fed has waited too long to start easing monetary policy. While the data showed weaker hiring, the monthly rate remained above 100,000 and various measures of the health of the economy aren't warning of an imminent recession. US small-business optimism, for example, recently increased to a more than two-year high in July.

Moreover, the forecasts among economists haven't materially increased, with the consensus staying at 30% since April after reaching nearly 70% in 2023.

The S&P 500 is still down over 4% since it's record-high in mid-July, while the tech-heavy Nasdaq 100 is down more than 8% from its peak.

Rate markets are pricing in the higher odds of a recession that equities in the Goldman and JPMorgan models. The 12-month forward implied change in the Fed's benchmark rate is implying a 92% odds of a recession in the next year, according to Goldman's models, while the move in five-year Treasury yields shows a 58% chance of economic slowdown according to JPMorgan.

Still, there's plenty of soothing signals in the credit and mortgage markets, where risk levels aren't signalling much concern.

Christian Mueller-Glissmann, the head of asset allocation research at Goldman Sachs, said that despite the increased odds assigned by its market model, the firm's economists only see a 25% chance of a downturn, "which is still relatively low".

Source: Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

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Westpac

Central Bank

The RBNZ cut the OCR to 5.25% at its August policy meeting by unanimous decision.

We think the RBNZ only seriously considered the option of cutting the OCR by 25bps at this point. The Governor noted that there are further meetings this year where further adjustments can be made.

The revised projections lowered the OCR track significantly. The track implies that the next easing will occur at the October Monetary Policy Review, and a total of 75bp of cuts are forecast by end 2024.

The track implies the RBNZ’s monetary policy strategy is to more quickly ease policy over the next 6-12 months. The RBNZ aims to reach neutral OCR levels of around 3% by 2027 as previously expected – but reaches there more quickly.

The RBNZ’s near-term forecasts for economic growth have been revised down significantly. A wider output gap and looser labour market gives them confidence that inflation will ultimately fall.

Inflation is forecast to fall back inside the 1-3% band in the September quarter of this year and is still not projected to return to 2% until Q2 2026.

The RBNZ assesses the risk profile for inflation as balanced – and now two sided. We think the risk profile is decidedly to the upside for non-tradables inflation pressures. RBNZ August 2024 MPS Review: Ready… Steady… Go!_1

RBNZ August 2024 MPS Review: Ready… Steady… Go!_1

Key take out: OCR cut 25bps and further easing seems likely this year

The RBNZ unexpectedly cut the OCR to 5.25%. The decision to cut by 25bps today was reached by consensus and so no vote was taken.

As widely expected, the RBNZ’s projected track for the OCR was revised significantly lower from that seen in the May MPS.

The projected average OCR in Q4 this year was revised down 73bps to 4.92%, at face value implying three 25bps rate cuts by the end of this year.

The projected OCR for Q4 2025 was revised down 129bps to 3.85%, implying a further around 100 bps of rate cuts next year.

The forecast for Q4 2026 was revised down 57bps to 3.12%, implying around three 25bps cuts in that year.

The RBNZ assumes the OCR reaches around 3% in Q3 2027 (the final quarter of the forecast).

According to the RBNZ, the most important driver of the revised view were a significant downgrade in the near-term growth outlook (as we had foreshadowed in our recent Economic Overview). This weaker growth profile and resultant weaker output gap has increased the MPC’s confidence that inflation will continue to fall to the mid-point of the 1-3% target range over a similar timeframe as previously expected. Indications of weaker price intentions and inflation expectations have further buttressed the RBNZ’s confidence that domestic inflation pressures will ultimately normalize.

Risks

We think the RBNZ’s revised growth forecasts are well balanced in the short term. The RBNZ has included a relatively firm bounce back in the economy over 2025 compared to our forecasts. Having said that, the much easier interest rate profile compared to our more conservative OCR forecast assumptions explains some of that relative optimism. Interestingly, the RBNZ does not see the front-loaded easing profile impacting on house prices significantly in the next year. There could be some upside risks there in coming quarters given the generally strong inverse relationship between interest rates and house prices.

The risks around their short-term inflation projections also look well balanced, although from early 2025 the RBNZ has an optimistic view on how quickly non-tradable inflation will fall. We are not so sure about that, and it will be up to the data to confirm this is going to occur.

Westpac’s OCR call

We remain comfortable with the previous forecast of two further 25 bp cuts to the OCR over the balance of the year (from the lower 5.25% starting point). Hence, we expect the OCR to end 2024 at 4.75%. Beyond that we will make a full assessment in coming days.

CPI inflation to fall below 3% sooner than expected

Underlying the downward revision to the RBNZ’s interest rate projection is a better contained outlook for inflation. Inflation surprised the RBNZ to the downside in the June quarter and it’s now expected to fall below 3% in the September quarter. That’s sooner than the RBNZ had assumed in May, and in line with our own forecasts for inflation over the remainder of this year.

Further ahead, the RBNZ is sounding increasingly confident that inflation will settle close to the 2% midpoint of their target band (though this still isn’t expected to be reached until mid-2026). We’re also expecting to see inflation trending back towards 2%. However, there are some key areas where we think the RBNZ might be surprised.

RBNZ August 2024 MPS Review: Ready… Steady… Go!_2

First, and most importantly, is the ‘stickiness’ in domestic inflation. The RBNZ expects that domestic inflation will drop back sharply over 2025 as capacity pressures ease. They’ve also allowed for a faster easing in price setting behaviour (i.e. inflation expectations) and more moderate increases in the prices for items like insurance. We’re less optimistic about how quickly domestic inflation will ease and expect that it will continue to surprise the RBNZ to the upside (as it has done over the past year).

RBNZ August 2024 MPS Review: Ready… Steady… Go!_3

Balanced against that risk of persistent domestic inflation, imported inflation (i.e. tradables) has fallen well short of the RBNZ’s forecasts. The RBNZ is projecting a reacceleration in imported inflation next year after some sharp falls recently. In contrast, we expect that it will remain soft for some time. That will help to keep overall inflation and inflation expectations contained.

Near-term GDP growth forecasts revised down

A key driver of today’s decision was a sharply downgraded view of the near-term outlook for activity, with crucial implications for the labour market (see below) and the output gap. Indeed, the RBNZ’s forecasts for GDP growth in Q2 and Q3 were revised down by a cumulative 1.1ppts and at -0.5%q/q and -0.2%q/q respectively are nearly identical to the estimates that we included in our recent updated Economic Overview.

As a result, while the RBNZ has again revised down its estimate of the economy’s potential growth rate, the RBNZ now expects the output gap to turn more negative over the coming year, troughing at -2.2% of GDP in Q4 this year, rather than a trough of -1.6% of GDP in Q1 next year.

Given the much easier monetary conditions included in these projections, the RBNZ’s forecasts also build in a much stronger cyclical rebound in activity next year. Indeed, the RBNZ now expects GDP to grow 3.3% over the 2025 calendar year up from 2.4% in the May MPS.

As a result, the output gap is expected to shrink to -1.2% of GDP by the end of next year, which is slightly smaller than the -1.4% of GDP output gap projected in the May MPS. It is worth noting that this rebound is quite a bit stronger than forecast in our recent Economic Overview, albeit with our forecasts based on firmer monetary conditions than implied by the RBNZ’s revised projections.

RBNZ August 2024 MPS Review: Ready… Steady… Go!_4

RBNZ August 2024 MPS Review: Ready… Steady… Go!_5

The RBNZ’s labour market view

The RBNZ acknowledged the softening in the labour market, particularly in the near term – the sharp slowdown in job vacancies and the fall in filled jobs in the last few months were among the high-frequency activity indicators that the RBNZ highlighted in its Statement. They expect the unemployment rate to rise further in the coming quarters, reaching a peak of 5.4% in early 2025. That’s higher than their previous forecast of a 5.1% peak, though it’s within the range of forecasts that the RBNZ has produced over the last couple of years. Along with that increasing slack in the labour market, the RBNZ expects a faster moderation in wage growth.

RBNZ August 2024 MPS Review: Ready… Steady… Go!_6

RBNZ takes relatively sanguine view on impact of Budget 2024

The August MPS is the first to be released since Budget 2024 was unveiled in late May, and so the first to fully incorporate an estimate of the full impact of the new Government’s policies. The RBNZ’s view on the impact of fiscal policy is set out on Box B of the MPS.

The RBNZ notes that spending reductions in the public sector will reduce inflationary pressure, and income tax threshold changes will increase inflationary pressure. A fiscal multiplier of 0.5 is assumed to apply to both spending reductions and tax revenue reductions – in line with estimates derived from past research in New Zealand, but this assumption is recognised as a source of uncertainty. The RBNZ also noted that tax cuts can also increase labour supply and affect wage bargaining, which may partially offset the inflationary pressure from higher spending.

Given that the May MPS had already implicitly accounted for a share of the lower government spending, the RBNZ’s updated assumptions about fiscal policy have added slightly to medium-term inflationary pressure. However, those effects have clearly been swamped by other economic developments. Overall, the RBNZ concluded that the net impact for monetary policy is expected to be small and is highly uncertain. Over coming months, the RBNZ will refine its estimates in light of the emerging data.

Key domestic data to watch ahead of the RBNZ’s October Review

The next RBNZ policy review will take place on 9 October. In addition to any important economic or financial developments offshore, there are several domestic economic data releases that will have a significant bearing on the outcome of that meeting. The most important are:

The Q2 GDP report

(19 September): The outcome of this report will be compared to the RBNZ’s estimate, with any deviation having implications for the RBNZ’s estimate of the output gap and perhaps also its view on near-term growth momentum.

The Q3 QSBO survey

(1 October): The focus will be on indicators of spare capacity and cost/ inflation pressures. It will also be interesting to see if confidence, hiring and investment indicators are lifting from low levels as monetary conditions ease.

Selected price indexes

for July/August (15 August/12 September): These indexes will cast light on some of the most volatile components of the CPI and thus on the certainty that the Q3 CPI (16 October) will show inflation back inside the 1-3% target band.

Employment indicators

for July/August (28 August/30 September): Developments in the labour market will remain a key focus for the RBNZ and these indicators will provide insight into the likely outcome of the Q3 labour surveys (released 6 November).

The August Electronic Card Transactions

report (12 September): This release will capture the first month of retail spending since the personal tax cuts took effect.

In addition to the above, key monthly activity indicators such as the Business NZ manufacturing and services indexes and the ANZ Business Outlook survey will also be of interest.

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RBNZ

Remarks of Officials

Central Bank

On August 14, local time, the RBNZ announced the result of its August interest rate decision, unexpectedly cutting interest rates by 25 basis points to 5.25%. Excerpts from its monetary policy statement are as follows:

New Zealand's economy is experiencing sluggish growth and economic activity is likely to decrease in the middle of the year. Restrictive interest rates, sluggish global growth, falling net migration and reduced government spending are continuing to reduce domestic demand, and the economy is moving from a period of excess demand to one of excess supply.

The June quarter data suggest that employment growth has slowed, with private sector jobs, hours worked and wage growth all falling. Employment growth is expected to weaken further in the coming quarters as a result of tighter government spending and public sector job losses.

Subdued economic activity has meant that firms have cut back on hiring. Job vacancies have continued to fall and businesses reported that it is much easier to find workers. Net migration has recently slowed from a high level and is expected to fall further in the coming year. Nevertheless, the labour supply continues to grow. In turn, the weakness of the labour market and the decline in headline inflation have led to a decline in nominal wage growth.

Inflation fell considerably in the June quarter, due mostly to lower tradables inflation, while domestic inflation declined in line with expectations. Business inflation expectations have returned to around 2 percent at medium- and longer-term horizons. All measures of core inflation have fallen and the components of CPI that are sensitive to monetary policy have declined further. Combined with weak high-frequency indicators of economic activity, these developments strengthened the Committee's confidence that headline inflation would return to the target range in the third quarter.

Recent indicators provide confidence that inflation will continue to return to target within a reasonable period. Monetary policy will need to remain restrictive for some time to ensure that domestic inflationary pressures continue to dissipate. The pace of further easing will therefore depend on the Committee's confidence that pricing behaviour remains consistent with a low inflation environment and that inflation expectations remain close to the 2 percent target.

New forecasts from the RBNZ show that the average official cash rate (OCR) is expected to be 4.92 percent in the fourth quarter of 2024 and 4.62 percent in the first quarter of 2025. Annual inflation is expected to be 2.3 percent in the third quarter of 2024. GDP is expected to contract by 0.5 percent in the second quarter of 2024 from the previous quarter; By the middle of 2025, the average OCR is expected to decline by 101 basis points.

RBNZ August Rate Decision

Risk Warnings and Disclaimers

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Owen Li

Stocks

Investors might be reading too much into last week's historic surge in the Cboe Volatility Index, better known as the VIX or Wall Street's "fear gauge."

Instead of signaling widespread panic, the VIX's dalliance with crisis levels may have had more to do with a quirk in how the index is calculated, Wall Street strategists said. As a result, any market-timing signals investors had gleaned from the move are likely useless, according to Peter Tchir, chief macroeconomic strategist at Academy Securities.

"I think the VIX 65 print is a garbage piece of data … use it in your investing at your own peril," Tchir said in a report shared with MarketWatch.

Why A Historic Surge in the VIX Wasn’T the Signal Investors Thought It Was_1

To recap: The VIX -12.51% topped 65 at around 8:30 a.m. Eastern time on Aug. 5, capping off its biggest intraday swing on record, according to Dow Jones Market Data. The index had only reached higher levels during the 2008 financial crisis and around the time of the COVID-19 crash in 2020.

At the time, a sense of fear was palpable across markets: Japanese stocks had just seen their biggest daily drop since 1987, and S&P 500 futures were down 4.4% as traders grappled with U.S. recession worries and the unwinding of a popular yen carry trade.

Amid the tumult, Tchir and others latched on to the notion that the VIX move still seemed large relative to where stocks were trading. Tchir ultimately concluded that liquidity issues in the options market had likely distorted readings of the index.

One indication that the jump in the VIX might not be reflective of a commensurate surge in demand for hedges could be found in VIX futures, Tchir said. The front-month VIX futures contract didn't rise nearly as much as the VIX itself, calling into question the move in the index.

Tchir ultimately zeroed in on a more likely culprit. As markets tumbled, options dealers had adjusted bid-ask spreads in some of the most illiquid S&P 500 options, he concluded. This appeared to have an outsize impact on the level of the index, even though relatively few trades in the options used to determine the level of the VIX had actually taken place.

A team of Bank of America analysts arrived at a similar conclusion in a report shared with MarketWatch on Tuesday.

In the report, the BofA team pushed back on popular explanations for the jump in the VIX — like the notion that it had been driven by the unwinding of speculative "short volatility" bets, which typically pay off if the VIX falls or remains low.

After taking a closer look at the tape, the BofA team concluded that a few trades in illiquid out-of-the-money S&P 500 options likely had a major impact on bid-ask spreads across the options chain.

The level of the VIX is determined by a mathematical formula that relies on the bid-ask spread of S&P 500 options expiring between 23 days and 37 days out.

Call options represent an agreement to buy a stock at an agreed-upon price before a specified expiration date. They typically represent a bullish position on the part of whoever is holding the option. Puts, meanwhile, represent an agreement to sell at a predetermined price before a predetermined expiration. They can be used to hedge a portfolio against losses, or they can represent outright bearish bets.

An option contract is considered out of the money when the strike price is below the level where the market is currently trading, in the case of a call — or above it, in the case of a put.

Finally, the VIX quickly moved lower once Wall Street had opened for trading, helping to support the theory that liquidity issues were behind its premarket jump, the BofA team said.

U.S. and Japanese stocks have already clawed back their losses from early last week. But both Tchir and the BofA team said the fact that investors didn't see a genuine washout means stocks could be vulnerable to more volatility in the coming weeks.

The historically volatile months of September and October could once again prove to be a challenging stretch for markets this year, the BofA team said.

The VIX was on track to finish below 20 on Tuesday, down 49% from its Monday closing high north of 38. The nearly 50% drop in the index since then represents the biggest six-day slide for the VIX on record.

Meanwhile, the S&P 500 1.68% and Nasdaq Composite 2.43% were poised to climb for a fourth consecutive day, while remaining on track for their biggest four-day jump since November.

Source: MarketWatch

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Samantha Luan

Central Bank

WELLINGTON, Aug 14 (Reuters) - New Zealand's central bank slashed its benchmark cash rate for the first time since March 2020, sending the local dollar tumbling as policymakers flagged more cuts over the coming months saying inflation was converging on its 1% to 3% target.

The decision to reduce rates by 25 basis points to 5.25% came almost a year ahead of the Reserve Bank of New Zealand's (RBNZ) own projections, taking some market players by surprise.

The policy easing was in line with market pricing but defied most economists' expectations, with 19 of 31 economists in a Reuters poll having forecast the central bank to hold steady as they have since May 2023.

"The Committee agreed to ease the level of monetary policy restraint by reducing the OCR (official cash rate)," the central bank said in its statement.

“The pace of further easing will depend on the Committee’s confidence that pricing behaviour remain consistent with a low inflation environment, and that inflation expectations are anchored around the 2 percent target,” it added.

Investors reacted by knocking the kiwi dollar down 0.75% to $0.6032 , erasing most of the 1% gains made overnight as soft U.S. producer price data slugged the U.S. dollar.

Swaps shifted to imply another 29 basis points of easing by October and 67 basis points of easing by year end. Rates are seen near 3.0% by the end of 2025, well below the RBNZ's projection. Bank bill futures also jumped.

ASB Bank chief economist Nick Tuffley said he expects the RBNZ will continue steadily cutting the cash rate by 25 basis points in consecutive meetings.

“If inflation pressures evaporate faster than expected, the RBNZ may need to hasten the return to a more neutral setting of around 3.25%,” Tuffley added. ASB Bank along with Kiwibank announced they would cut their mortgage lending rates.

The RBNZ's forward guidance suggested at least three more cuts by the middle of next year, projecting the cash rate at 4.9% in the fourth quarter of 2024 and 4.4% in the second quarter of 2025. Previously, it had not expected to start cutting rates until the middle of 2025.

The minutes of the meeting, released alongside its statement, said the Committee observed that the balance of risks has progressively shifted since the May Monetary Policy Statement.

“With a broad range of indicators suggesting the economy is contracting faster than anticipated, the downside risks to output and employment that were highlighted in July have become more apparent,” the minutes added.

A global front-runner in withdrawing pandemic-era stimulus, the RBNZ has lifted rates 525 basis points since October 2021 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.

New Zealand's annual inflation has come off in recent months and is currently running at 3.3% with expectations that it will return to the central bank's target band in the third quarter of this year.

The rate hikes have sharply slowed the economy with meagre first quarter growth and recent data indicating still-subdued momentum.

New Zealand joins other central banks that are starting to ease rates. The European Central Bank, Canada, Sweden and Switzerland have all cut interest rates and an increasing number of analysts are now pencilling in a half-a-percentage-point rate cut for the Federal Reserve's September meeting.

New Zealand's neighbour Australia, however, is an exception to the global easing trend. The Reserve Bank of Australia last week ruled out near-term rate cuts.

Source:Reuters

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Samantha Luan

Central Bank

SYDNEY—The Reserve Bank of New Zealand cut its official cash rate by 25 basis points to 5.25% after a policy meeting Wednesday, but signaled that a shallow easing cycle would likely play out given that domestic inflation pressures remain worrisome.

“With headline CPI inflation expected to return to the target band in the third quarter and growing excess capacity expected to support a continued decline in domestic inflation, the committee agreed there was scope to temper the extent of monetary policy restraint,” the RBNZ said in a statement.

“However, members noted that monetary policy will need to remain restrictive for some time to ensure that domestic inflationary pressures continue to dissipate,” it added.

While money markets had priced in a strong expectation that the RBNZ would cut interest rates, the consensus among economists was that the central bank would hold rates steady.

The decision to cut follows recent data showing inflation in New Zealand softened by more than expected in the three months through June.

Consumer prices rose by 0.4% in the second quarter of this year, and by 3.3% from the same period a year earlier. The annual rise was lower than the 3.6% increase expected by the RBNZ.

The easing in policy brings RBNZ in line with many of its global peers that have either started to cut interest rates or are likely to cut before the end of the year.

New Zealand’s economy has moved in and out of recession over the last two years and unemployment has been rising, while inflation expectations have been declining.

Source:The Wall Street Journal

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