The case for a cut to the official cash rate is growing, according to BNZ economists, as the New Zealand dollar rises and the domestic housing market stalls.
The market consistently been pricing in a rate cut for the past year and it is saying there is an 85% chance of a cut over the coming 12 months.
“While we think the odds are overdone, the situation has certainly changed sufficiently for us to be much less aggressive in our dissension,” BNZ economists say.
“For us the catalyst for an easing will be continued appreciation in the NZD accompanied by a stalling in the domestic housing market.”
To back up its case it points to a very weak PMI, followed by yesterday’s weak Performance of Services Index. These suggest that third quarter GDP numbers “might print very poorly indeed.”
“Consensus forecasts for global growth remain under pressure and, importantly, the demise of the western world is now having a very clear impact on emerging markets. The Australian economy is looking demonstrably shaky, resulting in grief for domestic manufacturers, and the Reserve Bank of Australia is easing. The NZD TWI sits stubbornly 1.4% above the RBNZ’s assumed Q4-average. And the annual CPI is about to print below the bottom edge of the RBNZ’s 1-3% target range.
“We, thus, now put the probability of an easing as high as 35%.”
So what’s stopping the Bank from acting?
- While the global environment looks ugly, there are indications that Europe is stabilising and the first signs that the Chinese expansion may be rejuvenating;
- The currency might be higher than assumed but dairy prices are again rising and the overvaluation (relative to the Reserve Bank’s assumptions), is, at this stage, modest;
- The housing market continues to gain momentum;
- The medium term outlook remains for heightened inflation;
- The Christchurch earthquake rebuild appears to be starting in earnest;
- There are the first signs of credit growth; and
- The new Reserve Bank governor, Graeme Wheeler, has barely gotten his feet under the table and will not be keen to wave his wand until he knows exactly what he is waving it at.
