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Reserve Bank's rate cut decision on a knife edge

Monday 6th May 2019

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Will New Zealand's new monetary policy committee opt to cut or will it hold? Markets are split, as are economists with Westpac Bank saying the decision is "on a knife edge" and ASB Bank calling it "finely balanced." 

Market pricing points to a 50 percent chance of 25 basis-point rate cut to 1.5 percent. The median in a Bloomberg poll of 17 economists is for a 25 basis-point rate cut to 1.5 percent. 

Reserve Bank governor Adrian Orr surprised markets in March when he said "given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next official cash rate move is down."

Since then, inflation has been lower than expected and while the unemployment rate dipped in the first quarter the underlying data was weak. 

Wednesday's decision is the first to be made by a new committee. The new structure emerged after phase one of a review of the Reserve Bank Act to modernise the policy frameworks, governance, and accountability arrangements announced by the Labour-led government shortly after taking office.

The new committee, which includes four internal members and three external members - removes sole interest rate decision-making by the governor.

Capital Economics says a recent string of soft economic data will be enough for the Reserve Bank of New Zealand to cut to 1.5 percent.

"Since the RBNZ shifted to an easing bias in March the economic data have remained generally subdued, supporting the case for a rate cut. And we suspect that a rising unemployment rate and subdued underlying inflation in 2019 will force the bank to cut rates again in November."

It doesn't anticipate the switch to a committee will have much impact. "We don’t expect the new committee members or structure to make any significant differences to the future direction of monetary policy. But the release of the meeting minutes and the non-attributed record of any votes taken should make the RBNZ’s position a little more transparent."

Westpac Bank economists say they marginally favour a cut. "We think the odds of an OCR cut are about 55 percent, versus a 45 percent chance of no change." Regardless of whether it cuts or holds, Westpac expects the bank's forecasts to show the official cash rate reaching 1.4 percent before rising again. 

ANZ Bank chief economist Sharon Zollner expects the central bank to leave the official cash rate at 1.75 percent but "we expect a dovish tone, in line with the March OCR review, and a downward-sloping OCR forecast track implying around 35 basis points of cuts by the end of the year."

She notes that domestic data has confirmed the "economy is cooling but hardly freezing up." 

ANZ expects a rate cut in August, with two more to follow. "In our view, the Monetary Policy Committee will be convinced by August that an OCR cut is necessary to be able to credibly forecast inflation sustainably returning to the midpoint of the target band over the medium term," it says. 

ASB Bank's chief economist Nick Tuffley said "on balance, we think the new Monetary Policy Committee will have seen enough evidence to justify acting and will deliver a 25 basis-point OCR cut in May, followed by a further 25 basis-point cut in August."

He also expects the published interest rate track to signal at least one more rate cut this year. 

A key piece of the puzzle will be what happens in Australia on Tuesday, where a rate cut is about a one-in-three chance, according to market pricing. 

"With the Australian general election on May 18, our Australian colleagues do not expect the RBA to cut the cash rate, but to adopt an easing bias. If, however, the RBA did cut the cash rate, then it would be game on for NZ market pricing," said Tuffley. 

TD Securities chief Asia-Pacific Macro Strategist Annette Beacher said she is still leaning toward a "dovish pause" from the RBNZ. Despite some headline disappointment, the economy has maximum sustainable employment and inflation expectations are well-anchored at 2 percent despite fluctuating food and fuel prices, she said. 

(BusinessDesk)

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