As expected, the RBNZ left the OCR unchanged at 1.0% at today’s OCR Review.
The press release suggested that the RBNZ does not currently see a need to cut the OCR further. The overall assessment was that the outlook for monetary policy “has not changed significantly” since the August MPS. The RBNZ seems to be saying that its actions to date are sufficient. It noted that the OCR cuts to date have led to lower lending rates and a lower exchange rate; and it expected low interest rates to generate a pickup in domestic demand over the coming year.
The RBNZ did say that there was room to cut further “if required.” We interpret this as an easing bias rather than a signal. In other words, the RBNZ views a cut as more likely than a hike, but is not committing to either at this point.
Actually the RBNZ’s words were that there is scope for more “fiscal and monetary stimulus” (our emphasis), which amounts to a suggestion that the Government should engage in fiscal stimulus. That’s an unusual move for the RBNZ.
Overall, the tone of the RBNZ’s Review was in line with what we expected but a little less dovish than markets were expecting. Consequently, interest rates and the exchange rate rose slightly.
We are currently forecasting a cut in the OCR in November. The RBNZ today did not sound like a central bank that is planning on doing that. Nevertheless, we are sticking to our call, because we expect economic data between now and November will be weak. We expect to see emerging evidence that GDP growth in the September quarter has been lower than the RBNZ’s previous forecast; we expect the unemployment rate to rise; and there is a risk that inflation expectations remain too low for the RBNZ’s comfort. If we are right about the upcoming flow of data, the RBNZ would have enough evidence to cut in November.
We do not expect the RBNZ to cut the OCR after November. By that stage, we expect that the housing market will be picking up in response to the mortgage rate cuts already delivered, and that this will deter the RBNZ from further OCR cuts.
