OCR Cut: What economists said

The New Zealand dollar immediately dropped half a US cent to as low as 57.48 US cents, and has since headed lower, while in the wholesale market two-year swap rates dropped about six or seven basis points.

A number of banks had cut their lending and deposit rates in the days leading up to the decision.

RBNZ’s decision comes despite the annual consumers price index hovering near the top of its 1% to 3% target range and it appears the central bank is more concerned that cautious behaviour by households and businesses slowing the recovery than it is by inflation getting out of control again.

Economists had been divided ahead of the decision over whether the RBNZ would cut by 25bp, as it forecast in August, or make a bolder 50bp cut.

A key piece of information is that the monetary policy committee (MPC) was able to reach the decision by consensus rather than having to go to a vote.

“It was always going to be a bit of a challenge if you had a split decision,” says Nick Tuffley, chief economist at ASB Bank. “It was clear-cut over what was the appropriate thing to do and the odds are they will cut further if things run to plan.”

The MPC minutes emphasised that RBNZ expects the inflation rate to have hit 3% in the September quarter, reflecting large increases in administered prices, food prices and other factors.

“Excluding the influence of administered prices, quarterly non-tradables inflation has continued to decline and is at levels consistent with price stability,” the minutes say.

The minutes also made it clear the MPC considered only two options, a 25bp cut or 50bp.

Concerns about the amount of excess capacity in the economy ran through the minutes but RBNZ said it has revised its assessment of spare capacity only marginally, noting that factors such as high milk prices and unfavourable weather conditions likely contributed to higher livestock retention and lower meat production.

Higher energy prices likely weighed on manufacturing more generally, the minutes say.

Sharon Zollner, chief economist at ANZ, who had been picking a 25bp cut, noted she had described the decision between a 25 or 50bp cut as “a coin toss.”

“We did think they would value optionality – they clearly do,” even though the MPC opted for the larger option.

As for RBNZ’s next move due in November, “essentially, they could possibly cut 25, or cut 50, or not at all, without blushing” about today’s statement, Zollner says.

While the MPC has said it’s open to more cutting, it also gave reasons to downplay the surprisingly large 0.9% decline in June quarter GDP.

Zollner described the OCR decision as “a front-loading of the forecast they made in August” and that the RBNZ has made no promises of future OCR cuts.