No cut expected for OCR

Most of the economists who responded to the survey think the Reserve Bank will leave the OCR unchanged at 2.75% next week.

Just one – Doug Steel from BNZ – bucked the trend. He thought there was a 51% probability that the RBNZ will cut the OCR by 25 bps on Thursday.

The rest of the economists surveyed were divided in when they expected the RBNZ to cut the OCR again, although they all thought the next cut would be triggered by factors like low inflation, a high NZD or increasing overseas risks.

Those who thought the RBNZ would cut the OCR by 25 bps to leave it at 2.5% in December edged out those who are anticipating the next cut, again of 25 bps, will be in early 2016.

Many indicated that Reserve Bank Governor Graeme Wheeler’s speech last week had influenced their views.

Westpac chief economist Dominick Stephens said there will be few surprises in next week’s announcement because the RBNZ let the cat out of the bag in a “hawkish” speech last week.

In his speech Wheeler said that recent economic indicators have been more encouraging and that further easing in the OCR was likely but it will depend on the emerging flow of economic data.

Stephens said he expected this stance to be repeated word for word and that it will be the key sentence of the OCR announcement.

“But the Reserve Bank’s easing bias will be softened via a more upbeat description of economic conditions, and probably also via qualifying sentences within the crucial policy guidance paragraph.”

He added that, while the RBNZ is currently planning one more OCR cut (to 2.5%) in this cycle, Westpac is forecasting three cuts.

More conviction and a toning down of the hawkish elements is needed from the RBNZ in its OCR announcement next week, TD Securities head of Asia-Pacific research Annette Beacher said.

“The Reserve Bank needs to enhance the prior easing bias with “some further easing in the OCR could be needed soon”, buying time for more information ahead of the December 10 decision on the cash rate.”

While it was generally accepted that the RBNZ would not cut the OCR next week, several of the economists believed it should.

ASB chief economist Nick Tuffley said the RBNZ appears to be comfortable keeping the OCR on hold till December, but he thinks a cut next week would be more prudent.

“We are wary of the risks that inflation is more subdued over 2016 and 2017 than the RBNZ anticipates,” he said.

“Underlying pricing pressures are very muted and the NZD has rebounded. We are also very mindful the Reserve Bank could be overestimating how stimulatory interest rates are for the economy.”

Deutsche Bank chief economist Darren Gibbs agreed the RBNZ is likely to “needlessly delay” its policy easing until December.

His impression is that the RBNZ is reluctant to lower interest rates too quickly, especially considering still strong activity in the housing market.

“The RBNZ also appears to see some merit in ‘keeping its powder dry’ in the event of a significant downturn in the global economy.”