RBNZ Preview: Expect the 25bp cut in the Official Cash Rate (OCR) - TDS

Research Team at TDS, suggests that the RBNZ is widely expected to cut the Official Cash Rate (OCR) by -25bp this Thursday, to a fresh record low of 1.75% and the Bank will also release updated GDP and CPI projections with its quarterly Monetary Policy Statement.

Key Quotes

“Strong activity growth, including the buoyant housing market, is still not translating into broad-based inflationary pressure, and global risks remain, heading into 2017.

A cut to 1.75% is unanimous consensus and over 80% priced in the OIS strip. However, it’s the Bank’s statement and forward guidance via OCR projections (not 90d bank bills) that will determine the financial market reaction. With the tone shifting in recent weeks, we now believe a “hawkish cut” is unlikely to shock the markets.

For the RBNZ, a balancing act

The RBNZ has an enviable problem: above-trend growth, full-employment, but below-target inflation. However, if the RBNZ confirms that the easing cycle is over, the subsequent exchange rate rally could crimp inflation and expectations. Even if the economy appears to be coping with the buoyant exchange rate, the Bank doesn’t want to risk derailing growth and having inflation and inflation expectations plummet.

While the exchange rate (and energy prices) are key, the RBNZ can really materially impact the housing cycle through interest rates (i.e. domestic inflation, not tradable). It is highly unlikely that this week’s OCR cut will be passed through to mortgage rates given the elevated cost of funding, limiting scope to fuel this sector further. In addition, there is early evidence that the RBNZ’s investor restrictions (40% deposit from 1 October) is limiting activity. These two factors support a OCR cut this week, but neither are guaranteed to be supportive for 2017.

For the record, after this week’s OCR cut to 1.75%, we leave it at 1.75% through to mid-2018. Two local analysts have dropped their expected February 2017 cut in recent weeks, hence a “hawkish cut” is unlikely to be the surprise that it might have been even a month ago.”