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OCR calls favour hold

Not so long ago most economists were picking that another OCR cut would be announced at next week’s Reserve Bank meeting, but now the mood has changed.

Friday, June 3rd 2016, 1:15AM
by Miriam Bell

Low inflation continues to be an issue but, as reported recently, a range of different factors are now influencing the situation.

These factors include the healthy domestic economy, the booming housing market and the improving global outlook.

While economists are emphasising that next week’s OCR announcement is a close call, all but two of those who responded to the regular survey are not expecting a cut.

Westpac chief economist Dominick Stephens said that, until recently, the June 9 monetary policy statement (MPS) seemed a straightforward call – especially given the inflation outlook remained low.

“But there is now less urgency for the Reserve Bank to reduce the OCR, following a range of developments that have pushed inflation forecasts up closer to the Reserve Bank’s target.”

It now looks as though the June MPS decision will go down to the wire, he said.

“After running through our analysis, we have come to the conclusion that the Reserve Bank is slightly more likely to keep the OCR on hold than to cut in June.

“Thus we are changing our OCR call – we now expect the final cut of the year to occur in August, rather than June, leaving it at 2.0%.”

ANZ chief economist Cameron Bagrie, BNZ senior economist Doug Steel, HSBC chief economist Paul Bloxham, NZIER senior economist Christina Leung all also favour another 25 bias point OCR cut in August.

Bancorp Treasury Services senior advisor Peter Cavanaugh is picking December for the next, and final, OCR cut in this cycle.

Leung said that, despite solid domestic economic growth, the inflation outlook remains subdued.

“We do not expect annual inflation to edge back into the Reserve Bank’s 1-3% inflation target band until the end of this year.

“As long as the Reserve Bank’s primary focus is on bringing CPI close to 2%, it will see further monetary policy easing as warranted. Managing asset price inflation is a secondary aim.

This suggests it will see further scope to cut the OCR, she said.

“We see the June meeting as a very close call, but expect the Reserve Bank will choose to wait until August to cut the OCR.”

Bagrie said ANZ doesn’t believe the economy needs additional stimulus right now, but does think the Reserve Bank will retain an easing bias in its approach.

“The combination of downside scenarios, explicit commentary (“further easing may be required”) and a downwardly sloping bank bill projection will make it clear about the likely direction of any future moves,” he said.

While he expects the Reserve Bank statement to imply one further cut, he wouldn’t be surprised if it also hinted at the possibility of no further easing at all.

“The data almost demands a little more balance to return to the discussion, at least relative to the Reserve Bank’s tone earlier in the year. But fear of turbo-charging the NZD further means this is probably a step too far for the Reserve Bank for now.”

Global unease, the high NZD and prospects for increased competition for deposits mean Bagrie is picking cuts in August and early 2017.

“However, it is far from a strong conviction view (we put the probability of an August cut at just 60%). The trade-offs of further easing will need to be weighed carefully.”

ASB chief economist Nick Tuffley is one of those who is expecting the Reserve Bank to cut the OCR by 25 bias points again next week.

A further cut in August, to 1.75%, is likely to be triggered by the Reserve Bank revising down its view of inflation pressures, he said.

“Next week we will be interested to see the extent of the Reserve Bank’s concern about low inflation expectations and its degree of concern about financial stability risks from housing.”

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