Why further easing from RBNZ likely?

Latest survey by ANZ research revealed that New Zealand economy though showing positive response to Reserve Bank of New Zealand's (RBNZ) rapid easing, much more is needed to steer the economy back to its old glory.

• Headline business confidence rose by 10.2 points in September to net -18.9%. Firm's won activity expectations, which is the best proxy for growth fell rose to 16.7% from 12.2% in August.

Most of the correspondents feel that situation has improved but lot more needed.

• Retailers and agricultural firms expect lower profits, while manufacturing, construction and services sector firms expect higher.
  
  
• Residential construction enjoying better days as residential construction index rose sharply from 12.1 to 28.6, while commercial construction index rose marginally from -9.4 to -4.

Inflation expectation has now broadly stabilized around 1.7%, though notably lower for Agriculture at 1.48. Notably New Zealand inflation currently stands at 0.4%. Last time New Zealand had deflation was back in 1999 and even then survey expectation was higher than current.

RBNZ has this year actively cut interest rates consecutively for three times since April from 3.5% to 2.75%, which has now pushed Kiwi to 0.638 against Dollar.

Looking at the current scenario, inflation expectations, it can be inferred that further cuts from RBNZ is likely even if it chooses to pause over one meetings.

RBNZ might choose to pause in October but expect at least another 25 basis points cut by year end.

Kiwi is likely to maintain its downside bias, and price is likely to reach our longer term objective of 0.56.