First impressions of the RBNZ’s May Monetary Policy Statement.
The Reserve Bank reduced the OCR to 1.50% at today’s Monetary Policy Statement.
The statement was bang in line with our expectations.
The press release consisted of a justification for cutting the OCR – low inflation, slowing domestic economy, and global risks. There was nothing at all in the press release to indicate what the RBNZ is thinking about future OCR moves.
The RBNZ forecasts the OCR to drop to 1.4% by March 2020 – this is roughly equivalent to half a further cut. This allows for the possibility of further OCR cuts, but does not commit the RBNZ.
Our interpretation is that the RBNZ is genuinely open minded about whether to cut the OCR again or not.
We judge the probability of a follow-up OCR cut in June as low. August is more of a live possibility, but our current forecast is that the RBNZ will keep the OCR on hold at 1.5% until mid-2020, when it will reduce the OCR again.
The OCR cut caused two year swap rates to fall 15 basis points and the exchange rate to fall 0.7 cents.
Mortgage rates have plunged over the past two months, and today’s OCR cut will cause them to fall further. We think the consequence will be an upturn in the housing market, starting in the second half of 2019.
