More cuts on the horizon

The Reserve Bank cut the OCR by 25 basis points to a new record low of 2.0% this morning.

It pointed to weak global conditions, ongoing low inflation and the high New Zealand dollar as the reasons for its move.

As such, the Reserve Bank said monetary policy will continue to be accommodative – and further cuts to the OCR are likely to come.

ASB chief economist Nick Tuffley said the Reserve Bank’s move was in line with their expectations, as was the bank’s retention of a firm easing bias.

“The 90-day track has a low of 1.8% by mid-2017, as we expected, implying an OCR of 1.5-1.75%.”

Tuffley said the New Zealand dollar was called out as making it difficult for the Reserve Bank to meet its inflation objective.

“They need the dollar to decline from current levels. Or the risk is that they will need to rely on interest rates for longer.”

For these reasons, ASB expects the Reserve Bank to cut once further, in November, when they have received the next set of key economic data, he said.

Westpac acting chief economist Michael Gordon said the OCR cut was widely expected, although market pricing was placing some probability on a 50bp move.

He said the Reserve Bank’s words signalled that at least one more cut is coming.

“The statement highlights that the Reserve Bank is not motivated by a need to stimulate the economy as such. Rather, the concern is that inflation could remain low for an uncomfortably long period.

“The Reserve Bank expects inflation to rise to 1% by the end of this year - just within the 1-3% target range. The near-term weakness in inflation has been compounded by the rise in the New Zealand dollar.”

While the annual inflation rate is expected to rise in the second half of next year, the Reserve Bank doesn't expect inflation to reach the 2% target midpoint until September 2018, Gordon said.

“The Reserve Bank’s main concern is that an extended period of low inflation could feed into lower inflation expectations which would compound the difficulty of getting inflation back to target.”

Westpac expects a further 25bp cut to the OCR in November, taking it to a low of 1.75%, he said.

“However, we acknowledge that the 22 September OCR review is 'live', and that there could be more than one further rate cut in the coming months.”

ANZ chief economist Cameron Bagrie agreed there wasn’t much that was surprising in the Reserve Bank’s MPS this morning.

“We expected them to cut. They have done so and flagged that another cut is likely.

“But meeting market expectations is not enough to keep the currency down. If the NZ dollar doesn’t head down the Reserve Bank will have to keep going with interest rates in a bid to meet its inflation target.”

“It seems inevitable the OCR will head lower still, though not necessarily immediately. We now expect a cut in November and another in early 2017.”

NZIER senior economist Christina Leung said the Reserve Bank’s OCR call this morning indicated the bank was willing to cut the OCR more beyond today’s cut.

“We think we are looking at two more cuts. Their primary focus is inflation and until it gets back on target they will keep cutting.”

Leung said loose monetary policy globally was resulting in currency wars and New Zealand was being dragged along.

“The Reserve Bank has been cutting to try and keep the dollar down. But while our economy is doing better than many others it is still attractive from an investment point of view.

“It is hard to see today’s cut as putting sustained pressure on the New Zealand dollar. Ultimately, you have to look at the fundamentals”.