By Christian Hawkesby*
The RBNZ’s June Monetary Policy Statement is shaping up to be one of the most interesting since the RBNZ made its last rate hike in July 2014.
Both markets and economists are picking a 50/50 chance that the RBNZ cuts the Official Cash Rate on 11 June.
The Overnight Index Swap (OIS) market is pricing a little over a 50% chance of a 25 basis point cut at the June meeting and a 100% chance that the OCR is 25 basis points lower by July; with the OCR priced to settle at nearly 3.00% by the end of 2015. Similarly, economist expectations are split into two distinct camps. Of ten bank economists, four are picking cuts in June and July; four are picking no change in 2015; a couple are splitting the difference.
There is an important distinction to make about what the RBNZ “should do” and what the RBNZ “will do”.
Those economists expecting the RBNZ to cut rates in June and July often cite the reasons why they“should” cut: inflation remaining below the mid-point of the target; unemployment being higher than expected;a softening dairy sector; and other policy actions being in place to address imbalances in housing supply and demand.
Those economists expecting the RBNZ to stay on hold through 2015 often cite the RBNZ’s recent communications making it hard to make the case that they “will” cut in June. In the April OCR Review, the RBNZ clearly stated that “it would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.” However, it is hard to say these conditions have definitely been met. Evidence has been mixed. Importantly, the RBNZ’s own inflation expectations survey ticked up slightly in May.
Whether or not the RBNZ get over the line to cut the OCR in their June MPS, there is a potentially more important point. That is, the arguments in favour of an interest rate cut before the end of the year are strengthening. Indeed, these may become more compelling as we head into 2016 as recent growth drivers – Canterbury rebuild, net migration – begin to abate, at the same time that falling dairy incomes begin to bite.
Table 1. Survey of economists: RBNZ expectations
|
|
June | July | Sept | Oct | Dec |
End 2015 |
| ANZ | -25 bps | -25 bps | 3.00 | |||
| ASB | -25 bps | -25 bps | 3.00 | |||
| BNZ | 3.50 | |||||
| Credit Suisse | -25 bps | -25 bps | 3.00 | |||
| Deutsche Bank | -25 bps | -25 bps | 3.00 | |||
| Goldman Sachs | -25 bps | 3.25 | ||||
| JP Morgan | 3.50 | |||||
| Kiwibank | -25 bps | -25 bps | 3.00 | |||
| UBS | 3.50 | |||||
| Westpac | 3.50 | |||||
| Average | 3.23 | |||||
Source: Harbour Asset Management (28 May 2015).
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*Christian Hawkesby is a director and head of fixed income at Harbour Asset Management.
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