ANZ National Chief Economist Cameron Bagrie delays expectation of first Official Cash Rate hike out to 2014; first bank economist to shift from mid 2013

ANZ National Chief Economist Cameron Bagrie became the first of the big four bank economists to shift his view on when the Reserve Bank will hike its Official Cash Rate (OCR) out to 2014 from mid 2013.

He said shifting his view gave him room to expect a rate cut if conditions worsened further. Bagrie argued the sharp slowdown in China was hitting Australia, which meant there was a chance the Reserve Bank of Australia would be cutting its rates in 2013.

A rate hike in New Zealand at the same time was  "nigh on impossible", given it would strengthen the New Zealand dollar vs the Australian dollar. A weak NZ dollar vs the Australian dollar had been a key shock absorber for the New Zealand economy.

"We've flatlined our expectations for the OCR, even further pushing out the first tweak up to 2014," Bagrie said in a note to clients.

"The spirit of this move is two-fold. First, I don't think you can credibly say any more that rate hikes are on the horizon anytime time soon, so flagging something in 2014 is basically saying we don't want to even mention the prospect; and second, pushing it out gives us scope to call a cut if we need to," Bagrie said.

"The latter is a space I'm not yet in, but developments across the Tasman are starting to really worry me (along with some local specifics such as employment)," he said.

"It's clear China is slowing sharply. The commodity boom has seen costs explode and with commodities now falling the cost side will start to hurt - quickly I suspect. I expect more cuts from the RBA and what that implies for the NZD/AUD could rapidly change financial conditions locally. It's nigh on impossible to envisage the RBA cutting rates in 2013 and the RBNZ hiking. A low NZD/AUD has been a massive shock absorber that has helped to offset the high NZD/USD.   Losing that shock absorber would be most unwelcome."

Economists from Westpac and ASB are forecasting the Reserve Bank will increase the OCR from 2.5% around mid 2013. BNZ is still formally saying the OCR would be hiked in March, but has hedged its recent views by saying it may shift it out to mid 2013. Infometrics is picking a mid 2013 hike, while NZIER has forecast a 2014 hike for some months. Economists have been progressively delaying their expectations of when the OCR would be hiked from its record lows this year.

Bagrie said he was not formally forecasting a stronger New Zealand dollar vs the Australian dollar, "but I suspect its around the corner if indeed the RBA cuts rates further."

He also said he was a bear on Europe, pointing to risks France's sovereign debt situation would worsen.

"My concern is with the growth side of the equation at present across Europe. Balance sheet issues get exposed quickly when growth is absent which is what is occurring. It's dangerous to tweak your view when it appears darkest before dawn, but the brutal reality is that we've been here numerous times over the past few years, gravitating from risk-on to risk-off and not much changing in a general sense," Bagrie said.

Here is the rest of his note:

I fully expect to see more ups and downs. Central banks will not remain idle. China, the ECB and Fed all look set to deliver. However, game theory tells me that a sustained solution to Europe's challenges are not around the corner despite prospective initiatives by the ECB and the missing ingredient to a sustained solution is still growth. And the US election is around the corner with a huge fiscal issue to address. I'm struggling to see how monetary policy in NZ can become too disconnected from Fed policy and the RBA.

We expect the Fed to change their forward guidance to on hold until 2015 at next week's FOMC meeting and another rate cut or two from the RBA looks around the corner, so NZ can hardly be too far out of step for fear of turbo-charging the NZD. It's far from an ideal way to run monetary policy but the environment we are in is far from ideal as well.

There are the obvious local issues to remain mindful of (Auckland housing and the Christchurch rebuild) but I simply think they are superseded by the bigger picture and in the case of the Christchurch rebuild I'm still pretty cautious on timing, and fiscal policy will offset a huge part of it anyway. There are a host of other issues I could go on about and I haven't even mentioned inflation which will see some food related boosts in the coming year. We'll keep an eye on it but its hard to paint an inflationary picture at present.