Next to no chance of OCR cut

Not only is there unanimous agreement that the OCR will remain on hold at 1.75%, but there is limited expectation of the Reserve Bank moving from an explicitly neutral bias.

All the economists who responded to the regular mortgagerates.co.nz survey believe the OCR has reached its trough in this cycle.

Most put the probability of the OCR remaining on hold next week at 99-100%, although two economists went for the slightly lower probability of 95%.

Further, most think there is minimal chance of any more OCR cuts in this cycle.

NZIER senior economist Christina Leung said another cut would be the result of a global financial markets meltdown or a major natural disaster in New Zealand.

UBS NZ Ltd senior economist Robin Clements agreed. “Another cut would be triggered by an adverse global shock that undermines trading partner, and commodity price, expectations.”

The view that global economic circumstances would be the factor that led to a move by the Reserve Bank was generally held by survey respondents.

Several economists pointed out that not much has changed on the domestic economic front since the Reserve Bank’s last Monetary Policy Statement (MPS).

ASB economist Daniel Snowden said the overall outlook has not materially shifted since the February MPS - although there have been developments in the domestic inflation outlook and Trade Weighted Index (TWI).

For this reason, ASB expects the Reserve Bank to hold the OCR at 1.75% through to late 2018.

“In addition to leaving policy unchanged, we look for the Reserve Bank’s policy bias to again be fairly neutral.

“In particular, comments on the uncertain international outlook will be reiterated, stressing ‘policy may need to adjust accordingly’.”

TD Securities head of Asia-Pacific research Annette Beacher also thought the Reserve Bank will stick to a neutral bias in its language.

“The Reserve Bank needs to emphasise a ‘period of stability’ for the cash rate,” she said. “Otherwise it would be hawkish and undo NZD underperformance.”

ANZ chief economist Cameron Bagrie said that the Reserve Bank will use the OCR announcement as another opportunity to reinforce a “very neutral”, balanced and cautious stance on future OCR movements.

But, while nothing has changed sufficiently to warrant a change in the Reserve Bank’s neutral stance, ANZ disagrees with the bank’s assessment of the risk profile.

“While we certainly can envisage scenarios in which the OCR is cut again (largely involving global shocks), we see a far higher likelihood that the next move in the OCR is up.”

He said the market wants to trade one way because markets don’t “do” stability.

“Although pricing for hikes has been trimmed since the start of the year, a hike is still close to fully priced by February – far earlier than the late-2019 hike implied by the Reserve Bank’s projections.”

The Reserve Bank should be “chuffed” that banks continue to nudge up borrowing rates, leaving it flexibility to keep the OCR lower for longer than might otherwise be prudent, Bagrie added.

Meanwhile, there was unanimous agreement from the economists that the OCR will remain on hold until at least mid-2018.

At that point, the Reserve Bank is likely to raise the OCR by 25 basis points to 2.0%.

Westpac acting chief economist Michael Gordon said he expects next week’s statement to retain the message that “monetary policy will remain accommodative for a considerable period”.

“While the February MPS interest rate projections showed an uptick towards the end of 2019, we’d characterise this as saying that the first OCR hike is too far away to be specific about the timing.

“Next week’s statement is likely to be just as vague on the matter.”

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Interest rate risk equally balanced – RBNZ