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Bar high for NZ rate cut - economists

Wednesday 15th August 2018

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Economists agree the risk of a New Zealand rate cut is real but most don’t actually expect it to happen.

The central bank kept the official cash rate at a record low 1.75 percent last Thursday and pushed out the timing of the first rate hike. Governor Adrian Orr reiterated that “the direction of our next OCR move could be up or down.”

The kiwi dollar fell more than 2 percent as money markets moved to price in a 34 percent chance of a rate cut in May 2019 and Westpac Banking Corp NZ chief economist Dominick Stephens said he now puts the “odds of a cut at at least one in three.”

Stephens said the change has nothing to do with the state of the economy but is down to a change in the central bank’s behaviour since Orr came on board earlier this year.

Concerns about New Zealand’s slowing economy appeared to trump signs of emerging inflation for the central bank in last week's statement. 

“It seems there has been a systemic change of approach at the central bank. We strongly suspect that the new regime will prove keener to shore up GDP growth when it flags, and more willing to take a risk when inflation shows signs of rising,” he said.

While Stephens acknowledges the risk of a cut exists, he doesn’t actually think it is on the cards.

“We expect the economic data to improve shortly, so we think cuts are more likely to be averted,” he said. He does, however, now expect the first hike to come in May 2020 versus his prior view of November 2019.

ANZ Bank New Zealand also acknowledged the downside risks have increased but underscored the outlook would have to “deteriorate significantly” for a cut to be firmly on the table. 

Orr himself was upbeat about the economy in an interview on TVNZ1’s Q+A over the weekend.

"Our core forecast, the one that we hold most belief in, is that economic activity will actually be picking up from here, not stalling. And the signs are very positive," Orr said. 

Bank of New Zealand said while a rate cut is a “clear possibility,” it noted the actual hurdle for cutting is still reasonably high. 

Head of research Stephen Toplis now expects the central bank to remain on hold until August 2019, from a prior view of May 2019.  However, he warned economic growth appears to be “stagnating” around trend and said there is little evidence so far that the government's recent fiscal package for households is flowing through into spending.  

While he said growth may surprise on the upside in the short-term, longer-term "we are less optimistic that the capacity in the economy will allow the growth they are suggesting." 

“We doubt that even the substantial fiscal stimulus that is being delivered will result in a significant increase in the pace of the expansion,” Toplis warned. 

If that growth fails to materialise," it will push the central bank more toward their easing scenario." 

Capital Economics chief Australia and New Zealand economist Paul Dales said a rate cut is not part of his central forecast, mainly because the unemployment rate is close to the RBNZ’s assessment of maximum employment. 

The bank is now mandated with supporting maximum levels of sustainable employment within the economy along with keeping annual inflation between 1 percent and 3 percent.

“Unless that changes, then I’m not convinced the RBNZ would want to cut interest rates just to boost growth a little and try to raise inflation a bit quicker,” said Dales.

While he said it is possible “I think the outlook for the unemployment rate would need to deteriorate to prompt action.”


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