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One economist calls for OCR cut this week; others say wait

Expect the Reserve Bank to leave the OCR unchanged next week – despite many recent forecasts that cuts are likely this year.

Monday, June 8th 2015, 9:41AM
by Miriam Bell

Almost all the economists who responded to a survey believed the RBNZ will leave the OCR at 3.50% in its OCR and monetary policy statement on Thursday.

Only one predicted a cut.

HSBC chief economist Paul Bloxham said he favoured a June cut in the OCR to 3.25%.

Falling business confidence, weaker global conditions, very low inflation and the recent tightening of macro-prudential settings have opened the door for the RBNZ to cut rates, he said.

“We now expect the RBNZ to cut its cash rate to 3.00% by end-2015. They could wait for the Q2 CPI before cutting in late July, or cut in June – which we slightly favour. Expect another cut to 3.00% in Q4.”

ASB senior economist Chris Tennent-Brown said they expected the RBNZ’s easing bias to become more pronounced, including an explicit forecast of a fall in interest rates. He put a 40% chance on the RBNZ biting the bullet and cutting the OCR in June.

But, for that to happen, some sort of “Wheeler Factor” was required, he said.

“For example, the Reserve Bank governor would have to take a step back and look at the big picture of where the low recent and future inflation outcomes sit against the medium-term aspect of the inflation target.”

For this reason, he thought the RBNZ will choose to wait a little longer before cutting the OCR. “We expect the RBNZ to cut the OCR by 25 basis point apiece in September and October.”

However, many of the other economists were not convinced cuts would come this year.

Annette Beacher, from TD Securities, said the RBNZ would hold the OCR at 3.50% this week but would shift to an explicit easing bias.

“The RBNZ is likely to leave the rate unchanged until deep into 2016 at this stage. We think there is a 30% chance of a cut this year, but it would need a slide in domestic demand.”

There will be no OCR cut next week – or this year, agreed the NZIER’s Christina Leung.

In her view, the RBNZ won’t make a cut until June 2017.

“There’s probably a 30% chance of a cut. But a trigger could be a sharp rise in the NZD, a deterioration in the global outlook particularly with a sharp slowing in China, or a sharp drop in house prices.”

Leung said a cut would lead to further expectations of another cut, whereas keeping the OCR on hold with a conditional easing bias will limit further market reaction.

“An OCR cut would definitely fuel further interest in housing and I cannot see why the RBNZ would want to take that risk right now.”
Meanwhile, after all the dialogue surrounding the RBNZ’s and the government’s recent moves aimed at cooling down Auckland’s housing market, most of the economists felt their impact will be limited.

ASB’s Tennent-Brown said the actions will reduce housing-related inflation at the margin and give the RBNZ some comfort that the housing impact of lower mortgage rates will be countered.

While the housing policies are likely to slightly reduce inflation once in place, the final timing and extent of said policies have not yet been finalised, he continued.

“We expect the RBNZ will want to ensure these are clarified first so as to minimise any stimulatory impact OCR cuts might have on the Auckland housing market.”

However, HSBC’s Paul Bloxham said the RBNZ’s new macro-prudential measures had set the scene for an OCR cut.

He felt the measures will have an impact on the Auckland housing market and said that the RBNZ is likely to address the issue in its monetary policy statement next week.

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