There's now a "very good chance" the Reserve Bank will cut the Official Cash Rate to as low as 1.5%, according to Commonwealth Bank of Australia strategists.
This suggestion, contained in a CBA global research Kiwi Trade Note goes somewhat further than the current view of economists at CBA's New Zealand subsidiary ASB, though they changed their view this week from an expected OCR low of 2% and say the odds "have now tipped towards a 1.75% low in the OCR".
At the moment the OCR is at a historic low of 2.25% following a cut by the RBNZ on March 10. The cut came as a surprise to many because of comments by RBNZ Governor Graeme Wheeler on February 3, which appeared to portray him as a reluctant cutter of interest rates.
CBA senior interest rate strategist Jarrod Kerr and senior fixed income strategist Philip Brown say in their note that the risks facing the New Zealand economy are heavily tilted to the downside. They head their comments: "Wheeler the reluctant - well no more".
"We expect the RBNZ to cut in April to 2.0% and and then use the June MPS to explain a change in tack to 1.5%," the two said.
"The RBNZ’s two downside scenarios, outlined in the March MPS, show a move to 1.5%. The RBNZ’s previous downside surprise scenarios have become central scenarios for the past 18 months. We expect no different this time around," they said.
"We now see a very good chance that the RBNZ cuts the cash rate to 1.5%. The risk is the RBNZ tries to stay ahead of currency markets and cuts consecutively to 1.5% by August."
Kerr and Brown say they have upgraded their weighting in Kiwi interest rates from “raging bulls”, to “break the limits long”.
"We have heightened our conviction on Kiwi rates following an extensive marketing trip to middle earth. Governor Wheeler has proven himself responsive, not reluctant, but a little remiss," they say.
They outline three themes, which they say are "resonating with RBNZ officials, and Kiwi corporates".
The first is that the Kiwi dollar is too high, with the American dollar is largely to blame.
"The sharp turnaround in [US] Fed rhetoric reflects a high sensitivity to the USD and global developments. The Kiwi dollar is also too high against the AUD. The RBNZ can at least attack the Aussie. And like an All Black front row, the RBNZ must be the favourite here."
The second theme is that inflation expectations are too low.
"Tradables inflation is largely to blame. The currency is not helping with the reversal. Inflation expectations are falling. And expectations have become more backward looking. Mechanically, 2‑year ahead inflation expectations will continue to fall with the last CPI print. The auto‑regressive nature of expectations is frustrating for a central bank using forward guidance."
The third theme is that negative interest rates in some places mean lower lower bounds all round.
"The [Bank of Canada's] recently published “Prudent Preparation: The Evolution of Unconventional Monetary Policies” delivered a revised lower bound of ‑50bps for Canada’s policy rate. The BoC operate an effectively identical OCR to the RBNZ (and RBA).
"The BoC’s work strongly suggests a theoretically negative lower bound down under. Whatever we thought the lower bound was for the RBNZ’s OCR, it is much lower, and theoretically negative. We are all merely a spread to each other after all," Kerr and Brown say.
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