When it cut rates by 25bp this week, the RBNZ indicated that it would take a somewhat cautious approach to policy setting going forward. However, the recent flow of data suggest that New Zealand economy is likely to take a turn for the worse in the near term. Given that the output gap is already deeply negative – and is on track to widen further – we believe that the Bank will have to cut rates faster and further than it is currently signalling. Meanwhile, Australian CPI data released this week suggest that inflationary pressures are flaring up once again. As a result, we think the RBA will be reluctant to cut rates aggressively, despite signs of weakness in household consumption.
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