August RBNZ Preview: Focus on the interest rate cut cycle’s direction

■ The RBNZ is likely to reduce its policy rate to 3.00%, but the market is more concerned with its future policy stance.  

■ The RBNZ is less inclined to signal the end of its rate-cutting cycle at this stage. 
 
  The Reserve Bank of New Zealand (RBNZ) will announce the results of its Monetary Policy Committee (MPC) meeting on August 20. Markets generally expect the RBNZ to lower its policy rate by 25 basis points to 3.00%. If the result meets market expectations, the policy rate will reach the midpoint of the RBNZ's neutral range (2.5-3.5%) and move closer to the final rate cut level (end point rate) of 2.85% indicated at the May policy meeting. In other words, the RBNZ may signal the end of its rate-cutting cycle at this policy meeting. 

 
    Since the last policy meeting in July, economic data have shown a 2.7% year-on-year increase in the Consumer Price Index (CPI) in the second quarter, higher than the RBNZ's May forecast of 2.6% and the 2.5% increase in the first quarter. Additionally, employment data indicated the unemployment rate at 5.2%, aligning with the RBNZ's forecast (5.2%) and a slight deterioration from the first quarter's 5.1%. The labor force participation rate fell to 70.5%, the lowest since the first quarter of 2021. The prevailing market view is that the RBNZ will continue to expect CPI growth to stay within its target range (1-3%) and slow toward the midpoint (2%) by 2026. Therefore, inflationary pressures are considered short-term, emphasizing support for the labor market. Expectations for a rate cut at the August policy meeting are increasing. 

 
    The focus will be on the statement and the Monetary Policy Statement (MPS). Watch for any changes in the statement's wording. At its July policy meeting, the RBNZ stated that if medium-term inflationary pressures ease as expected, further policy rate cuts are anticipated. If this meeting signals the end of the rate-cutting cycle, this wording is likely to be revised. Additionally, the assessment of medium-term inflationary pressures, the endpoint interest rate level, and any changes to the timing of reaching that level in the quarterly MPS will be important market considerations. The May MPS forecast showed CPI growth expected to rise toward the upper limit of the target range within 2025 (Q3: 2.7% / Q4: 2.4%), with the target rate endpoint lowered from 3.10% to 2.85%. 

 
    Overall, the RBNZ is expected to cut interest rates by 25 basis points at this meeting but will not signal the end of its recent rate-cutting cycle. Inflationary pressures and the impact of US tariffs remain under observation, with only minor adjustments, such as a slight reduction in the target rate, expected.