Real possibility New Zealand central bank to start cutting rates this week

WELLINGTON (Reuters) - New Zealand's central bank may cut interest rates on Wednesday, a whole year earlier than its own forward guidance, as inflation slows, unemployment rises and economic growth remains anaemic, prompting markets to punt on an easing.

While a Reuters poll of 31 analysts last week found 19 respondents expect the Reserve Bank of New Zealand (RBNZ) to hold the cash rate steady at 5.5%, a dozen expected the bank to cut by 25 basis points and many acknowledged it was a line call for the central bank either way.

Markets have priced in a 76% chance of a cut, increasing their bets after the central bank's survey on Thursday saw inflation expectations fall to a three year low.

The RBNZ was one of the first central banks to withdraw pandemic-era monetary stimulus and has held the cash rate at 5.5% since May 2023 to curb historically high inflation.

The prospect of the Reserve Bank cutting rates when it meets on Wednesday is in stark contrast to forward guidance released in May that indicated lower borrowing costs were not likely before the middle of 2025.

“The New Zealand economy is contracting, spare capacity is rising rapidly, and the unemployment rate is some way from its peak. This is alleviating pressure on inflation and, importantly, lower wage growth will help bring down stubborn non-tradables inflation,” said Stephen Toplis, head of research at Bank of New Zealand in a note.

“We believe all the boxes have been ticked to allow the Reserve Bank to lower its cash rate now,” he added.

Even if the bank opts to hold interest rates steady, many analysts expect its forecasts will be revised. All but two of the 31 economists polled by Reuters expect the central bank to begin cutting rates this year, with the majority expecting the cash rate to be at 5.0% by the end of the year.

Westpac industry economist Paul Clark said in a note while he expects the central bank holding the cash rate at 5.5%, it is likely to position for cut rates later this year and also “make significant downward revisions to the cash rate track for 2025.”

(Reporting by Lucy Craymer; Editing by Lincoln Feast.)