RBNZ may dial back forecasts to show rates on hold for longer, could even signal a cut

Most economists expect the central bank to lift rates sooner than it is signalling.

Not only do economists expect the central bank to keep rates on hold next Thursday but some say it will delay any forecast hikes and could even signal a possible rate cut.

All 11 economists polled by Bloomberg expect the central bank to keep rates at a record low 1.75 percent at next week's review. In its May monetary policy statement, the central bank's forecasts indicated that rates would remain on hold until September 2019. Since then inflation and growth have been lower than the RBNZ expected and the New Zealand dollar is around 3 percent higher on a trade weighted index basis. An unexpected dip in employment data this week only strengthened the view that rates might stay on hold for even longer.

"We expect the RBNZ to show official cash rate hikes starting around early 2020, three-to-six months later than in its May MPS view, a reflection of the overall downward shift in inflation pressure from other sources. There is even some prospect the RBNZ flags the potential for an OCR cut, through lowering the OCR track below 1.8 percent in the near term," said ASB Bank chief economist Nick Tuffley.

Tuffley - like most economists - expects the central bank to lift rates sooner than it is signalling. However, he has also pushed back his expected kick-off date, largely because of softer-than-expected inflation. "We now expect the OCR will increase from the first half of 2019 and have pencilled in February. We previously thought the first hike would occur in November 2018," he said.

ANZ Bank New Zealand chief economist Cameron Bagrie also doesn't expect central bank governor Graeme Wheeler to "rattle the cage" in what will be his final cash rate decision and said the tone of the accompanying statement, projections and press conference will reinforce the bank's "cautious, watchful and neutral stance."

Bagrie also noted a case could be made for moving to an easing bias as core inflation has softened, activity growth is sub-trend, housing market momentum has slowed, financial conditions have tightened, the New Zealand dollar has strengthened, and global inflation has rolled over.

However, he not expecting an outright easing stance but something on the "dovish side of neutral" and also said the implied hikes within the bank's forecasts "should be removed."

Bank of New Zealand head of research Stephen Toplis noted that a "purely mechanistic approach" would now argue for a cut in New Zealand's cash rate given the balance of economic data, including lower than expected inflation, the spread between the cash rate and lending rates and the softer housing market. However, Toplis said a cut is unlikely given the economy is sufficiently capacity constrained and growing well enough that it needs no extra stimulus from the central bank. However, the "warning signs" cannot be ignored, he said.

Westpac Banking Corp chief economic Dominick Stephens also expects the central bank to be firmly on hold and said one area where it is likely to be "more forthright" is the exchange rate. According to Stephens, the recent rise to 74 US cents seems out of proportion with New Zealand's economic conditions and it "could even go so far as to say that if the exchange rate remains too high, monetary policy would have to be more accommodative than otherwise - terminology that it has used in the past."

Deputy governor Grant Spencer will take over as acting governor of the bank for six months, following the expiry of current governor Graeme Wheeler's term on Sept. 26 this year.


Login in or Register to view & post comments