Will the Reserve Bank change course?

The Reserve Bank adopted an "easing bias" through 2019, indicating rates were more likely to be cut than increased. But strong economic and housing data, and the Government's infrastructure plan, could make it abandon its negative outlook, say Westpac economists.

Westpac chief economist Dominick Stephens (pictured) says: "At both the August and November MPSs, the RBNZ implied there was a 50/50 chance of an OCR cut in the near future. The RBNZ’s finger was on the OCR-cut trigger. This was implied not only by the RBNZ’s language, but also by the RBNZ’s OCR forecast. The OCR forecast was 0.9%, half way between keeping the OCR at 1.0% and dropping it to 0.75%.

"We think the RBNZ will abandon this strong easing bias and move to a more neutral monetary policy outlook. We expect the OCR forecast will be steady at 1.0% for at least the coming year. The flavour of the RBNZ’s language may be that it expects to keep the OCR at its current level for an extended period, but will react to evolving data as necessary."

Stephens added: "The RBNZ will probably also repeat its long-held line that it expects to keep the OCR low for an extended period, to help ensure that markets do not overreact to the change of stance. This would be a small surprise to financial markets, which have been steadily moving away from the idea of OCR cuts, but probably still expect the RBNZ to maintain its easing bias."

While green shoots of optimism creep into the economic outlook, Westpac economists agree with Tony Alexander that the coronavirus could impact growth and the direction of the OCR. 

"The coronavirus outbreak is a key uncertainty. If the situation worsens enough over the coming week, then the RBNZ could maintain its easing bias. More likely, the RBNZ will adopt a “wait and see” approach, saying that it will monitor the coronavirus and react if necessary."

Westpac predicts the RBNZ will be prompted to cut rates in the second half of 2020. 

"We still think the longer-term risks are more tilted towards a lower OCR than higher," Stephens added.