07:12 AM EST, 02/14/2025 (MT Newswires) -- ING said it expects the Reserve Bank of New Zealand to deliver a second consecutive 50bps cut to 3.75% next Wednesday, broadly in line with consensus.

Inflation over the past two quarters has stayed within the 1%-3% range targeted by RBNZ amid a backdrop of weak economic conditions. In Q4 2024, non-tradable inflation slowed to 4.5% year-on-year, faster than the RBNZ had estimated at the November meeting (4.7%) when the central bank had already indicated another 50bps cut as the most likely scenario for February.

Every indicator released since the November MPC meeting has pointed to underlying weakness and a need for relaxing monetary policy, wrote the bank in a note. Business confidence marked a third month in decline while manufacturing PMI continued its 22-month streak of contraction. Consumers were a bit more confident on the back of previous monetary policy easing and slowing inflation but this was largely limited to higher-income groups.

The most concerning indicator was the labor market data released last week, stated ING. Nothing here is good. The unemployment rate rose to 5.1% and is almost at its COVID-19 peak, while the number of job vacancies declined. This combination even saw the participation rate dip as people left the labor force entirely.

The RBNZ has revised its rate cut projections lower multiple times as the economy has cooled faster than expected. This is in stark contrast to the country's nearest neighbor, Australia, which hasn't yet cut, pointed out the bank. Across the Tasman Sea, Australia has positive gross domestic product growth and a steady unemployment rate. It has stickier inflation, but even that is just 0.2% higher than New Zealand.

Markets have put an 85% chance of the Reserve Bank of Australia cutting at its next meeting as well as almost fully pricing in a 50bps move by the RBNZ (45bp in the price). ING predicts the projections to replicate a similar pattern where rates fall to a terminal 3% rate.

However, there are risks of another dovish revision, and the bank thinks the balance of risks is tilted to the downside for the New Zealand dollar (NZD) next week.

The NZD isn't set to receive the same kind of support destined for the euro (EUR) and Scandinavian currencies if a Russia-Ukraine truce materializes in February, added the bank. The United States's aggressive protectionist stance targeting China means ING retains its bearish bias on NZD/USD, at least through the summer.

Explorations below 0.55 are a tangible possibility. By the end of the year, investors could see some relative outperformance of NZD relative to AUD due to less structural -- such as export -- risk for New Zealand compared with Australia from a China slowdown, according to the bank.