September rate cuts in the United States could make it easier for the Reserve Bank to lower interest rates as well

A potential US interest rate cut in September could make it easier for the Reserve Bank of New Zealand (RBNZ) to loosen its own monetary policy, some economists say. 

The Federal Reserve gave its clearest indication yet of a rate cut after its meeting on Thursday. Chair Jerome Powell said a reduction might be on the table as soon as September, although any decision would be data-dependent.

This statement reinforced market expectations that the Fed would begin easing its monetary policy next month. Economists at ANZ said Powell’s comments were “a pretty strong hint” and Westpac NZ’s Kelly Eckhold said the Fed appeared to be “looking seriously” at a September cut but it wasn’t certain.

In New Zealand, financial markets are betting the RBNZ will begin its own easing cycle in October, and cut the Official Cash Rate (OCR) 75 basis points by year-end. The central bank held the OCR at 5.5% in its July meeting but indicated it was ready to relax policy settings as inflationary pressures eased. Most New Zealand economists expect a cut in November.

Although the RBNZ would not make its decision based on what other central banks do, some economists said lower global interest rates might make it slightly easier to loosen policy. 

Jarrod Kerr, the chief economist at Kiwibank, said rate cuts from the Fed could act as an “icebreaker” and help maintain the interest rate gap between the US and New Zealand. This could support the exchange rate and reduce inflationary pressure. 

UBS economist Nic Guesnon said rising unemployment was increasing the risk of an August rate cut by the RBNZ, despite persistent domestic inflation. He also said the global trend toward lower interest rates was significant for New Zealand due to its more cyclical and volatile economy.

However, other economists said US rate cuts would not significantly impact the RBNZ’s policy decisions, which will focus more on non-tradable inflation, employment, and other domestic data.

ANZ’s David Croy said the RBNZ Monetary Policy Committee likely would not discuss it at their August meeting, and only note it in the global context. Eckhold said rate cuts were unlikely to shift the exchange rate enough to concern the RBNZ.

The Kiwi dollar has fallen against its trading partners’ currencies over the past month, partly due to market expectations of possible RBNZ rate cuts. The US dollar and bond yields both declined after the Fed’s press conference, which may help to stabilise the NZ dollar.