Markets betting on three interest rate cuts this year, starting next month

Monday, 29 July 2024

Expectations of rate cuts are approaching fever pitch.

A sea change appears to be taking place on financial markets, with traders now expecting the Reserve Bank to cut the official cash rate by 75 basis points to 4.75% by the end of November.

Kiwibank said traders also believed there was a 60% chance the first cut would come when the central bank released its next monetary policy statement on August 14.

Those calculations are made by looking at the swap rates at which traders agree to trade debt, and as such are determined by flows of real money — rather than simply being forecasts — and are one influence on mortgage rates and other retail interest rates.

Kiwibank described the drop in expectations of future interest rates as “massive”.

Wholesale interest rates had collapsed as traders “many of them offshore”, placed big bets on the Reserve Bank easing monetary policy as early as August, it said.

BNZ also drew attention to the drop in yields on Monday, describing it as “relentless”.

Weak employment data released on Monday could increase expectations of an early cut to interest rates.

Stats NZ reported a 0.1% seasonally-adjusted drop in the number of filled jobs in June and also adjusted down its previous estimates of jobs growth in recent months.

BNZ said that suggested quarterly labour market data due out next week would be weak.

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The trends have been reflected in a fall in the value of the New Zealand dollar, which was trading below US59 cents on Monday, near its annual low.

However, both BNZ and Kiwibank suggested markets might be getting ahead of the Reserve Bank on the timing and size of interest rate cuts.

BNZ said in a research note that the interest-rate expectations had moved further than it had anticipated.

Kiwibank said it would have cut the official cash rate already, but thought an August rate cut would be a step too far for the Reserve Bank.

“We think they will lower all their forecasts and signal rate cuts by year end, rather than late 2025.”

But it concluded traders “as they often do” were jumping the gun on relief for borrowers.

“Too many cuts are priced-in for 2024.”