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Odds favour a rate cut but it's a line ball call

Monday 11th November 2019

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The odds are slightly in favour of an interest rate cut on Wednesday, but it’s by no means a done deal.

The central bank cut the official cash rate by 50 basis points to 1 percent in August but remained on hold in September. 

Of 18 economists polled by Bloomberg, 12 are expecting the Reserve Bank's monetary policy committee to make a 25 basis-point cut to 0.75 percent while six are expecting the central bank to remain on hold.  Market pricing points to around a 64 percent chance of a cut.

ASB economist Mark Smith is on the cut side of the equation.

“The growth outlook for the NZ economy still looks subpar, which should prompt the RBNZ ... to take out additional insurance to keep the economy on track,” Smith said.

He notes global growth is still slowing and “subdued domestic business sentiment is a signpost of the pressures weighing on the economy and the risk remains that firms retreat into their shells, cutting back on investment and employment activity and slowing growth.”

Business confidence recently improved slightly but remains deeply negative. A net 42.4 percent of the 412 respondents surveyed by ANZ Bank in October expect general business conditions will deteriorate during the coming year, down from 53.5 percent in September.

Also, the pending introduction of higher bank capital requirements already looks to be hampering credit availability for key sectors of the economy, said Smith.

The RBNZ is proposing to near double the minimum common equity tier 1 capital the four major banks have to hold from 8.5 percent of risk-weighted assets to 16 percent, with the smaller banks needing 15 percent, and for the changes to be phased in over a five-year period. There have been indications the central bank is considering increasing the phase-in period.

It is scheduled to announce its final decisions in early December.

Against that backdrop, not only will the central bank cut, but “we expect that the statement will leave the door open to prospective further easing. Not doing so would see both the NZD and NZ wholesale interest rates shoot higher,” said Smith.

ANZ Bank chief economist Sharon Zollner also tips a cut. The “global outlook remains shaky, businesses are wary, and changing bank capital requirements will tighten financial conditions, requiring a lower OCR to offset.”

She said the bank is likely to “stick to the general principle of it being better to risk overdoing it than miss the boat. It’s a long time until the next rate-cut opportunity in February.”

ANZ continues to forecast two more 25 basis-point cuts in February and May “with the final cut being a placeholder for acknowledging the tightening of monetary conditions associated with requiring banks to hold more capital.”

BNZ is tipping a cut but says it's unnecessary.

“After much to-ing and fro-ing, however, it will probably err on the side of a 25 basis-point cut. This is even though we think there is no overwhelming basis for it, at this juncture,” said BNZ economist Craig Ebert

“While interest rate cuts are supposed to stimulate the economy, what we’re actually hearing from businesses and households is that they are feeling very uneasy about it. Far from instilling confidence, the interest rate sinkage is piquing concerns,” said Ebert.

Meanwhile, Ben Udy, Australia and New Zealand economist at Capital Economics, said “the reduction in global risks combined with the better than forecast economic data mean the bank probably won’t cut rates any further in November.”

According to Udy, economic data have been in line with or, better than, the central bank’s expectations in August and it will probably be a little less worried about global conditions than at their last meeting.

However, he doesn’t expect it to last. “Ultimately though, we expect the economic data will not live up to the bank’s expectations,” he said. Capital Economics expects the bank to cut twice more by the middle of next year, bringing rates to fresh record low of 0.5 percent.

Westpac Bank also sees the RBNZ on hold for now.

“Our view was that, by the November review, the RBNZ would have seen a rash of downside surprises in the economy, prompting it to cut the OCR again. But that’s not the way the dice have fallen: there has been a mix of both positive and negative economic news recently, but with the balance coming out distinctly on the higher side of market forecasts,” it said.

TD Securities said “it’s a line ball call” but it expects a hold for now.

Among other things, “a 25 bps cut is unlikely to have a meaningful impact for SME businesses, corporates/institutions, commercial property or agricultural loans if credit is harder to access. Banks may tighten lending to defend their capital positions,” it said.

“We question the effectiveness of a hawkish cut against a risk-on backdrop. The Bank is likely to achieve more flexibility with a dovish pause,” it added.


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