A rate change before the summer break?

From Challenger Chief Economist Dr Jonathan Kearns

There has been growing speculation that the Reserve Bank of New Zealand (RBNZ) could deliver a bumper 75 basis point cut at its late November meeting because it is the last meeting before its long summer break. Given economic and institutional similarities, comparisons are often drawn between NZ and Australia. Does a long summer break between meetings make an end-of-year rate change more likely? And while an RBA cut this year is extremely unlikely, should we expect breathless speculation of a rate cut if we see a couple of weak data releases before December?

The RBA has historically taken a 9 week summer break between policy meetings with its monthly schedule skipping January. With the move this year to 8 meetings per year, the RBA will now be stretching its break between the December and February meetings to 10 weeks. This is double the gap between some of its meetings (including the preceding November to December gap). If the Board thinks a case for a cut is building, might a long break before the next meeting potentially sway the argument to cutting ahead of the break and not waiting?

The RBA has historically changed policy slightly more frequently at its last policy meeting of the year. Since 2000, there has been a policy change at 29% of December meetings, while other meetings have a policy change around 24% of the time, the same share as the first meeting of the year in February. Going back to 2000, changes came at 32% of December meetings, 20% of February meetings and 23% of other meetings. There does seem to be a bit of an itchy trigger at the end of the year.

The RBNZ tends to take an even longer summer break of 13 or even 14 weeks, although this year it will ‘only’ be 12 weeks. Three months is a long time to wait for the next opportunity to change rates. The RBNZ has historically changed rates at 32% of final meetings for the year, a bit less often than the 37% of other meetings with a policy change. Surprisingly, the first meeting of the year, which has more new data given the long break, has historically had a smaller frequency of rate changes, at 20%.

As a check it’s worth looking at the Fed, where the summer break does not coincide with the end of the calendar year, and they have kept a more even spacing of 6–8 weeks between all meetings. At their final meeting of the calendar year, despite not having a long break before the next meeting, the Fed has also been more likely to change policy. There has been a policy change 42% of the time at the last meeting for the year, in contrast to 31% at other meetings, and 21% at the first meeting of the year.

The Fed’s longest summer break tends to be between the August and September meetings. At the meeting before this break, the Fed has changed rates 30% of the time, more frequently than the 22% of September meetings and 26% at other meetings.

These are small differences, one or two different outcomes would make the frequency of changes more equal. The higher frequency of Fed policy changes at the end of the year suggests the long break isn’t the driver of more frequent policy changes at the end of the year at the RBA and RBNZ. And the RBNZ actually changes rates less frequently before their very long break. All up, the calendar shouldn’t be the thing that dictates expectations for central bank rate cuts.