Right, here we go. Here... We... GO! Time to grab that popcorn again, because this one's a live one. It's very alive. Mark the day Wednesday, August 14 in your calendar. In red.
Yep, for the first time since May 2023 we go into a Reserve Bank (RBNZ) review of the Official Cash Rate (OCR) with a real possibility that the rate might change.
The buzz around this OCR review is palpable. The build up has been improbable. And spectacular.
Going back to the May OCR review and Monetary Policy Statement (MPS) we had the RBNZ's shock 'hawkish' turn in which it gave a greater than 50% chance of the OCR INCREASING again, while cuts were seen as being well over a year away.
This was in fairly smart order followed in the next review in July by a muscle-contorting 'dovish pivot' in which the RBNZ made clear that OCR FALLS were very much coming into focus.
Since then we've seen the wholesale interest rate markets take up the running big time with more and more OCR cuts being 'priced in' to rates. The conniptions in global markets have all helped this along.
And then just in the past week we've had bank economists actually coming out and urging the RBNZ to cut. Which is quite extraordinary really.
A 50-50 call
At the time of writing the market was pricing in a 50-50 chance of a cut in the coming week - with just a slight leaning more towards there being a cut. For October there's nearly TWO 25 basis point cuts priced in, while by November there's more than THREE cuts priced in.
But please take the above information with all due health warnings. It has been volatile out there. Before the release of the labour market figures that I'll talk about in a minute, a cut had been FULLY PRICED in for August 14. It's been a wild ride, so, please accept that the situation might have changed somewhat again by the time you read this.
All of this comes amid a backdrop of an economy that in and around the month of June seems to have come off the rails, bashed into a large building, and rolled over on to its side.
This economic note from BNZ head of research Stephen Toplis gives a nice summary of some of the very recent economic data lowlights. Read them and weep, you might say.
One thing that could have tipped the balance towards imminent rate cuts would have been if unemployment rose more quickly than expected. It didn't. The unemployment rate as of the June quarter rose from an upwardly revised 4.4% in March to 4.6% as per figures released on August 7. The RBNZ had forecast 4.6% (so, bang on the mark) while many other economists forecast 4.7%. In addition wage rises were still quite strong. Therefore there was nothing in those labour market figures to suggest urgency for the RBNZ to cut. Hence the pulling back of market expectations for a cut.
However, it should be noted that the 4.6% unemployment rate is a three-year high, and there's no doubt the economy is now being bent backwards by the strongly restrictive monetary policy and an OCR that has been at 5.50% for well over a year now.
Do we wait for inflation to completely behave?
So, what's that 5.50% OCR all about? Well, it's all about inflation, which in mid-2022 peaked at an eye-watering 7.3% and then only slowly and stubbornly started making its way back down. The RBNZ's mandated goal is to keep inflation as measured by the Consumers Price Index (CPI) within a 1% to 3% range, with an explicit target of 2%. But the annual inflation figure has been above 3% since June 2021.
Now though, things are moving along well, with the annual inflation rate at 3.3% as of the June 2024 quarter, down from 4.0% in March. Non-tradable, domestically generated, inflation has been the bugbear, and it was still at 5.4% as of the June quarter.
The key thing really then is the extent to which the RBNZ might want to wait till the 'headline' inflation figure ducks back under 3% (now universally expected to happen in the September 2024 quarter), and whether the still 'sticky' domestic inflation is itself enough to cause the RBNZ to want to wait.
The markets and economists are clearly of a combined view that it's not necessary to wait and that inflation will now take care of itself quickly. Therefore, goes the logic, time for cuts.
Such logic was given a further positive nudge by the release on Thursday, August 8 of the RBNZ's own latest Survey of Expectations, which showed expectations of future levels of inflation continuing to track lower - with expectations across all timeframes from one-year to 10-year all agreeably starting to converge around the RBNZ's explicit target of 2%.
Right, I'll take a quick pause here for some injection of context:
The RBNZ reviews the OCR seven times a year, with the reviews coming roughly every six weeks and with a three-month gap over summer. During the course of the year there are four reviews that are accompanied by a full 60-page-ish Monetary Policy Statement (MPS) complete with bells, whistles and forecasts. These MPS reviews alternate with three so-called Monetary Policy Reviews (MPRs) that consist merely of Governor Adrian Orr's statement and a summary of the meeting of the RBNZ's Monetary Policy Committee.
I explain all the above because generally the RBNZ has a preference for making rate changes or policy shifts during one of the MPS reviews. The obvious logic is that it is much easier to explain why you've done something in a 60-page document with charts, graphs and forecasts than it is in just a few A4 pages as per the MPRs.
Picking a start point for cuts
All of which is a long way around of saying that the logic would be for the RBNZ to either start the OCR cuts at the coming Wednesday's review - which is one of the ones accompanied by a bells and whistles MPS - or wait until the next MPS review, which is in November, and happens to be the last one for three months.
However...
There is a not-so-distant precedent for starting a rate cycle at an October OCR review. This was the very thing that happened at the start of the hiking cycle we've just had, with the OCR moving up in October 2021 from just 0.25% to 0.5% on its way very hurriedly to 5.50%.
That was all a bit odd though. The RBNZ was all set to start the hiking in August 2021 and had the MPS prepped to be supportive of the move - only for Auckland to get its outbreak of Covid Delta and for the hike to be pulled at the last minute.
It does mean though that if everybody's on the same page, it's eminently possible for the RBNZ to start a rate cycle in a non-MPS review. And October 2024 had been starting to emerge as something of a favourite from the economists and commenters for the start of the cuts. There would be a certain symmetry about that, three years after the hiking began.
But in recent days attention has increasingly turned to August as the potential start date. The banks for their part have been pouring on the pressure with some fairly aggressive cuts to both mortgage and term deposit rates. They have effectively been 'doing the RBNZ's job for it', though I'm sure the RBNZ itself would rather be steering the ship through an easing cycle than have the banks doing so.
The problem with the RBNZ opting to cut as soon as next week is that while the central bank would have the luxury of the full MPS document to explain itself and to lay out the future expected OCR path, it hasn't really had much opportunity to prepare the groundwork for cuts ahead of time. So, it would be explaining after the event. The event being the cut, of course.
The strangeness of the 'superhawk' MPS
The May 'superhawk' MPS document prepared us all for the RBNZ not making any cuts till the second half of next year. So, a cut in August 2024 would be around a full year earlier than the RBNZ's most recent forecast would have had us believe!
But of course there was the tyre-shredding U-turn that the RBNZ made in July. And while that wasn't backed up by forecasts, we didn't have to read far between the lines to see that the RBNZ was now eyeing cuts a lot sooner than next year.
This sequence of events, however, probably neatly explains why much of the most recent thinking has suggested that the RBNZ might use the August MPS to fully articulate the change of tack, and the expected future OCR cuts, and then we would see the first cut in October.
Of course there will be much interest around the latest forecasts that will appear in the August MPS. We can expect very significant changes - particularly in respect to the forward forecasts for the OCR level. But it's probably safe to say that the RBNZ WON'T be forecasting an OCR of 3.25% by the end of 2025 - even if that is what the markets are currently pricing in!
Anyway, my best guess then is that we won't see a cut in the coming week's review but that the way will be very much cleared for the start of cuts in October. However, this RBNZ under Governor Adrian Orr is nothing if not full of surprises, so, really expect anything in the coming week. If you hear a loud thump at 2pm sharp on Wednesday, August 14, you will know Orr has made me fall off my chair. (Again).
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