Call for expected next OCR cut to be delayed

While lower mortgage interest rates are allowing more first home buyers to get into the market, ASB says there is a case for holding a predicted further interest rate cut in July.

The bank says with the OCR around neutral levels a higher bar is needed to sanction further OCR adjustments.

A July OCR cut cannot be ruled out, but there is value in waiting, Nick Tuffley, ASB chief economist says. 

“The high starting point for inflation and inflation expectations suggests no imminent need for the OCR to move lower, absent of a large global downturn.”

Waiting beyond July will give the RBNZ time to assess the impacts of the global trade scene – likely to be uncertain and dynamic, he says.
“It would also allow the RBNZ to ascertain how transitory the current spike in New Zealand inflation is and implications for medium-term inflationary pressures.”

The bank has pencilled in 0.25% cuts in August and October and expects the OCR to end the year at 2.75%.

Tuffley says that the timing is fluid and heavily dependent on how the uncertain and dynamic global situation evolves.

Little extra to go on

On the trade front, the expiration of the initial 90-day pause on US Liberation Day tariffs is July 9 4:01pm New Zealand time, two hours after the OCR announcement.

And the 90-day tariff pause while the US and China negotiate runs until August 12. Unless the US signs widespread agreements (particularly with China and the EU) within the next month, the RBNZ will have little extra to go on.

Tuffley says the bank’s =reassessment is that it would take a significant deterioration in key US trade negotiations or other strong evidence that New Zealand inflation is rapidly cooling for the RBNZ to follow through with a July OCR cut.

Not enough information

On the domestic front there is a relative paucity of economic data between now and the July OCR review for the RBNZ to get a clear steer on how significant the short-term inflation spike will be.

Second quarter inflation figures will bereleased after the July Review, and the various RBNZ-sponsored inflation expectations measures aren’t due out until August.

He says the RBNZ may be inclined to wait. “Even a shock first quarter GDP number later this month might not move the RBNZ, given its scepticism over the accuracy of initially published figures.

“Every OCR decision for the rest of the year is effectively ‘live’. Trump’s bluster could be a bluff.”

He says inflation and inflation expectations are moving further above the 1-3% inflation target mid-point and it could be risky to assume this upward impetus will fade.

Parts of the economy are doing well; there is stimulus due to arrive from the 225 basis points of OCR cuts delivered this cycle.

“Our estimates suggest the effective mortgage interest rate will move into the low fives by the end of the year,” Tuffley says.

However, monetary policy makers need to look ahead and ASB’s assessment is the RBNZ will need to transition from acting to slow the economy to actively supporting it.

The global scene is troubling, with a looming trade war and trade policy flip-flops suggesting a global downturn is looming.

Tuffley says this will impact the New Zealand economy through a number of channels
and it is not just the export sector that will be impacted. The domestic economy is not strong enough to do the heavy lifting and, with fiscal policy effectively maxed out, the onus of policy support falls to the RBNZ.