RBNZ rate cut unlikely - for now

Without exception, the economists surveyed were certain the RBNZ would not change the OCR’s current rate of 3.5% next week.

Most of them also believed the rate would remain unchanged for the rest of 2015.

Two notable exceptions were the ASB’s Chris Tennent Brown who thought there was a 25% probability of a cut and Westpac’s Dominick Stephens who said there was a 40% chance of a cut.

However, many said the RBNZ might start to open the door to rate cuts over the course of this year.

Deutsch Bank’s Darren Gibbs said that, with very low current inflation and the very high exchange rate very high, the RBNZ will adjust their language to drop the pretence there is any near-term prospect of a rate hike.

“They will also leave open the possibility of a rate cut should evidence of weakening demand and domestic inflationary pressures come to pass – ie: adopt a contingent easing bias. If nothing else, the RBNZ might hope that this will help to jawbone the exchange rate lower.”

This view was bolstered by RBNZ’s Assistant Governor John McDermott’s speech on inflation yesterday.

McDermott said the RBNZ was not currently considering any increase in interest rates, but that evidence of weakening demand and domestic inflationary pressures would prompt them to consider lowering interest rates.

BNZ’s Chris Ebert said McDermott’s speech offered up some soft touches, at the edges.

“These suggested that if there is a bias for the OCR between now and the end of the year, it is more likely down than up. We can understand the market taking a bit of insurance in this direction (especially with a wary eye on global affairs), even though we don’t forecast a rate cut, as such."

But Infometrics Ltd’s Gareth Kiernan felt speculation about a cut, following McDermott’s speech, had got a bit ahead of itself. 

He said that, although McDermott was at pains to point out that there would be no rate rises in the foreseeable future, he also spoke about the inability of monetary policy to affect inflation in the short-term.

“This indicates that the RBNZ is not going to overreact to low short-term inflation outcomes and is instead more focused on whether medium-term inflation expectations are unduly low. Inflation expectations have eased, but not to a level yet that would concern the Reserve Bank.”

HSBC’s Paul Bloxham agreed – pointing out that McDermott also reiterated that the RBNZ continues to expect growth to generate more inflation over time in line with their March forecasts.

“While a near-term cut in interest rates may seem like a possibility, it is not current inflation but the medium-term outlook that matters to the RBNZ. And the strong growth outlook points to higher inflation down the track.”

Predictions of when the current cycle might peak varied [from mid-2016 to 2018], but most of the economists felt the level it would peak at would be 4%.

One differing take was offered by Tennent Brown who said the cycle had reached its peak now, at 3.5%.

Not surprisingly, a number of the economists made mention of the issues posed by the Auckland housing market.

Ebert said the recent speech by RBNZ Deputy Governor Grant Spencer acknowledged the market is roaring away again, but indicated the RBNZ feels locked into a very low OCR (because of the low CPI inflation outlook).

“In any case, Spencer would seem to see supply as the principal problem and, from the demand side, immigration and the supposed ‘tax-preferred’ status of housing. Anything but the low OCR, it would seem.”

Several of the economists also pointed out the potential impact of the international arena.

For example, Forsyth Barr’s Matt Sturmer said offshore direction is important. “If the US, UK and Europe begin to show signs of recovery then this will help the RBNZ.”