ASB economists don't believe the recent mood shift in financial markets and say the economic evidence points to a need for the Reserve Bank to make further interest rate cuts

Ignore the recent market chatter. The Reserve Bank WILL cut the Official Cash Rate next week and follow up again with another cut in February, according to the ASB economists. 

And Kiwibank economists say they still believe "the path of least regret" for the RBNZ is to stimulate now, as it's easier to tighten later.

"Waiting and hoping has proved ineffective in the post-GFC era, and as the RBNZ Governor noted, doing more now should mean doing less later," Kiwibank chief economist Jarrod Kerr and senior economist Jeremy Couchman said.

Until a week or two back it had seemed a sure fire thing (according to financial markets pricing) that the RBNZ would follow its monster 50 basis points cut to the OCR (taking it down to 1%) with another cut of at least 25 bps when it next makes a rates call on Wednesday, November 13.

But some recent more benign economic news and some reported comments from the RBNZ have suggested maybe a changing mood. Westpac economists officially changed their call last week and said the RBNZ would hold fire next week. 

BNZ economists said recent RBNZ comments had injected uncertainty into what the central bank would say and do next week.

In ASB's Economic Weekly publication, chief economist Nick Tuffley said he had attended a speech at the CBA Global Markets conference in Sydney by RBNZ Assistant Governor Christian Hawkesby last week. The speech was entitled: “Speaking, listening and understanding: The art of monetary policy communications”.

"An irony of this speech is that it showed how different listeners interpret the same communication," Tuffley says.

"Having listened to the speech in person and read the text later, my interpretation was that there were few implications for the market’s view of what the RBNZ would do in the future.

"However, one local bank said the speech made it wonder if the RBNZ was now less committed to a 25bp OCR cut this month, and that if it was unhappy with the (then) deep pricing of a November cut then it needed to more explicit about fact. Coincidentally (or not) another bank delayed its expectation of an OCR cut from November until February. All up and for various reasons, market pricing of a November OCR cut moved from 22bp before the speech was released to 13bp by the end of the week – implying a 50:50 chance."

Tuffley says a key line from the Hawkesby speech was as follows:

“In this scenario there is a danger that markets end up paying too much attention to our communications for what we have said ‘we will do’, leaving no one left to analyse the incoming economic data for what ‘we should do’. As a central banker, I am far more interested in listening to what ‘we should do’.” 

Tuffley says at the "risk of sowing further confusion", here is his interpretation of the comments:

"The RBNZ signals a particular course of action with its statements and forecasts. But, if the subsequent flow of events suggests the RBNZ should instead adjust its outlook, then people need to focus on the implications of those events rather than stay fixated on what the RBNZ has implied in the past it will do."

In other words, Tuffley says, don’t blindly follow what the RBNZ has said in the past it will do, be sure to update your view based on events. A different RBNZ decision may have become more appropriate instead of what has been previously signalled.

"So what do we think it is appropriate for the RBNZ to do?

"Keep cutting the OCR, by 25bp this month and in February."

Tuffley gives the following points in support of his reasoning:

• Business confidence is overall weaker, particularly businesses’ view of their own activity outlook, since the RBNZ last published its economic growth forecasts;
• ASB economist's growth forecasts have been pulled down considerably since the August MPS and are substantially weaker than the RBNZ’s, and other forecasters have similarly slashed their forecasts;
• Although Q3 headline inflation was marginally higher than RBNZ expectations, some of the causes were increases in government charges and a surprisingly sharp lift in domestic airfares;
• The RBNZ has yet to factor in the economic impact of its increased bank capital requirements, which even by its own calculations will impact on bank customer interest rates by 20-40bp. 

Tuffley says much of the RBNZ’s upcoming decision will depend on the extent to which it revises down its own growth outlook.

"The more it does, the slower the build-up in inflation pressure, and the greater the need for more stimulus."

Tuffley says there's also labour market data releases to get through this week (Wednesday, 6th), which could alter the balance of risks.

"But, given the wobbliness of the surveys, the RBNZ is likely to be careful in placing too much weight on them."

However, Westpac economists on Monday reiterated that they don’t think that there is enough "accumulated evidence" to prompt a further rate cut at this stage.

"However, the RBNZ will keep the door open for further easing, and we do expect a cut in February next year based on a renewed deterioration in global conditions."

BNZ senior economist Doug Steel said the BNZ economists don’t think there is any need for a rate cut "at this juncture".

"This should come as no surprise to our regular readers. But, by the same token, if the RBNZ sticks to the decision making framework it has made plain, we think it will feel compelled to ease policy further."