ANZ economists say the odds of the RBNZ sitting out 2015 are growing by the day with an 'extended policy siesta' possible

ANZ economists say the odds of the RBNZ sitting out 2015 are growing by the day with an 'extended policy siesta' possible

ANZ economists say the odds on the Reserve Bank holding the Official Cash Rate (OCR) at 3.5% through 2015 are growing by the day.

In their weekly Market Focus report ANZ's economists note interest rate markets have entered a period of "risk off" following the release of dovish US Federal Reserve minutes, cautious speeches from global policy makers, and sharemarket gyrations. They say dovish overtones from the Fed highlight New Zealand's yield advantage, help keep the New Zealand dollar elevated, and maintain downward pressure on OCR expectations.

"With a hike priced in by July there is scope for front-end rates to continue drifting lower if the market gravitates to the view the Reserve Bank could be on hold for most of 2015, which is an assessment we are increasingly accepting as the central scenario," ANZ's economists, led by chief economist Cameron Bagrie, say.

"The odds of the Reserve Bank sitting out 2015 are growing by the day; this week's GlobalDairyTrade auction will be key."

The next Fonterra GlobalDairyTrade auction is early this Thursday morning (NZ time). Both Whole Milk Powder prices and the headline Trade Weighted Index measure have roughly halved since February highs.

After four OCR hikes this year added a combined 100 basis points lifting the OCR to 3.5%, the Reserve Bank left the OCR on hold at its last review on September 11. The OCR is next reviewed on October 30, and then again on December 11. Most economists expect the Reserve Bank to leave the OCR on hold into 2015, with several predicting the next increase will take place sometime between March and June next year.

ANZ had been picking the next increase to take place at the Reserve Bank's OCR review on March 12. However, the bank's economists now have their OCR forecasts under review.

They point out a fall below 4% is on the cards for the bellwether two-year swap rate, which was at 4.02% on Monday.

"Technically this will require a significant re-rating of OCR expectations, but this is now underway with forward interest rates moving aggressively lower in the past week. OCR expectations have been slower to adjust, with 22 basis points of hikes still priced in by July," ANZ says.

"But with the onus now on dairy prices to rise and the Trade Weighted Index to fall, and with a wave of caution sweeping through the rural community, markets are beginning to seriously ask whether the Reserve Bank might be on the side-lines for much, if not all, of 2015. At this stage it is a bridge too far to make that call, but it does feel like the more vulnerable side from a price action perspective."

"We expect short-end interest rates to continue moving gradually lower, and to continue 'teasing out' the possibility of an extended policy siesta," ANZ's economists say.

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5 Comments

In their weekly Market Focus report ANZ's economists note interest rate markets have entered a period of "risk off" following the release of dovish US Federal Reserve minutes, cautious speeches from global policy makers, and sharemarket gyrations. They say dovish overtones from the Fed highlight New Zealand's yield advantage, help keep the New Zealand dollar elevated, and maintain downward pressure on OCR expectations.
 
Hmmmm;
The old adage that if something is repeated often enough it is soon assumed to be true couldn’t be more apt with respect to the Fed’s 2% inflation target. Last week, Bloomberg had a piece that did exactly that, describing how “Federal Reserve officials are hunting for new tactics to raise price increases to their target”  because “inflation is descending toward the danger zone”.
 
In fact, the September meeting notes cited several officials who worried that “inflation might persist below” the committees target for “quite some time.” Accordingly, the Bloomberg author, Craig Torres, pulled out his editorial pen and offered his opinion as if it were objectively obvious:

 
The Fed needs a clear strategy for getting the inflation rate higher after falling short of its 2 percent target for 28 consecutive months.

 
Well, now. Twenty-eight straight months of misses. Let’s see, even using the Fed’s systematically understated measure of inflation, the PCE deflator ex-food and energy, consumers’ savings and paychecks have lost 3.3% of their purchasing power during the last 28 months.
 
Apparently, had they instead suffered a 4.7% loss of purchasing power (2% inflation for 2.33 years) everything would be copasetic. Instead of remaining in a funk, as has been evident since it unexpectedly snowed last winter, they would have been spending up a storm. Presumably the US economy would have long ago hurtled through that pesky “escape velocity” barrier.
 
Isn’t it amazing that over the relatively brief period in question that shrinking the purchasing power of the dollar by 4.7%% versus 3.3% could make such a profound difference. Or maybe not. Read more
 
Let's face it, the QE ponzi racket of inflating assets values, and securities in particular, ran out of puff as the elevated levels of 'out of thin air' cash exchanges for government related securities became unsustainable.

The market has been trying very hard to deflate........they should all stop interferring and leave the markets to work its way through...They are only creating other long-term issues that will have consequences!!
 
Central bank manipulated and controlled economies hurts the people!!!

Cuts more likely than hikes.  
Unless NZ wishes to join global recession quicker. 
2015 likely to be 'interesting times'.  

My memory is short, but didnt a similar situation happen a few years ago when the OCR was lifted too early on "signs" of recovery only to be reduced back down some time later?

Yes, they then used the feb 2011 chch earthquake as an excuse to cut them 50bps back to 2.5%.
At that point (start of 2011) the property market was struggling after a dead cat bounce, since the feb 2011 rate cuts auckland prices have raced away, up about a third or so.