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As if the first Official Cash Rate decision to be made by the new Monetary Policy Committee wasn't intriguing enough, there's also a fair chance we may see the first rate cut since 2016

As if the first Official Cash Rate decision to be made by the new Monetary Policy Committee wasn't intriguing enough, there's also a fair chance we may see the first rate cut since 2016

By David Hargreaves

Well, get the popcorn and other refreshments ready, it's a double bill and it should be a blockbuster.

Next week sees the first Official Cash Rate decision to be made by the Reserve Bank's new Monetary Policy Committee AND the decision is a 'live' one, meaning that for the first time since November 2016 there's a real chance the OCR might change.

The OCR's been sitting undisturbed on 1.75% for two-and-a-half years now.

RBNZ Governor Adrian Orr, however, raised the flag on a possible cut when he last reviewed the OCR in late March.

Specifically, he said: "Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down."

While that sentence doesn't say in itself that the RBNZ definitely WILL cut the OCR, there would, as economists have pointed out, be little reason for the central bank to make such a comment unless a cut was being very seriously considered indeed.

There will be cuts, but when?

With this very definite shift to an 'easing bias' from the RBNZ, economists have now all pretty much shifted to expecting cuts this year. What they don't agree on is the timing. Some, such as Westpac and Kiwibank economists, think the OCR will be cut on Wednesday May 8, although Westpac economists have recently indicated they think that if there isn't a cut in May then there might not be one. Others think the central bank has nothing to lose by waiting another few months.

Economists at the country's largest bank ANZ broke ranks among the economists in a serious (and it turns out, correct) way late last year by coming out against the tide and predicting that the OCR would be cut to 1% by 2020

They think the central bank will wait till August before making the first one.

"It’s a toughie," says ANZ chief economist Sharon Zollner. "But weighing it all up we expect the RBNZ will leave the OCR unchanged at 1.75% at its Monetary Policy Statement (MPS) next Wednesday at 2pm. The RBNZ will reaffirm that it remains data dependent, but the baseline is now an expectation that the next move in the OCR will be downward, and we expect this to be reflected in the published OCR forecast."

'A downward-sloping OCR forecast track'

Zollner says the ANZ economists expect a "dovish tone" from the RBNZ, in line with the March OCR Review, "and a downward-sloping OCR forecast track implying around 35bp of OCR cuts by the end of the year".

BNZ Head of Research Stephen Toplis points to the "weaker" labour market data released on Wednesday, plus the recent CPI data, as almost certainly having increased the Reserve Bank’s discussion around the possibility of a rate cut.

"However, from our perspective the data are not soft enough for that to happen at next week’s MPS. If the Bank is to be pushed over the edge, we think that waiting until August would be a wiser option. After all, there is no urgency to move. There is no sign that the economy is about to tank any time soon, interest rate settings are already highly stimulatory and there is still risk on the other side of the equation,  i.e inflation pressures are still there in spades."

ASB economists aren't as certain that the RBNZ will wait. 

"We expect 50bps of OCR cuts over 2019 and have pencilled in cuts for May and August," says senior economist Mark Smith.

"The timing, however, is fluid and dependent on a range of factors. We suspect next week’s OCR decision is likely to be a coin toss, particularly if market pricing provides the RBNZ with a suitably large window."

'It's a big one'

Kiwibank chief economist Jarrod Kerr and senior economist Jeremy Couchman say next week’s RBNZ decision is a big one. They are picking a rate cut to 1.5%

"With the market roughly 60/40 on the decision to cut, or not to cut  that means the binary outcome will generate a significant move in markets, either way.

"...The commentary around the decision will either soften, or exacerbate the moves in markets. It’s shaping up to be a very eventful RBNZ call."

So, all this and the new committee structure too, which sees people outside of the RBNZ given input. 

Essentially the decision making process will still be very much in the hands of the RBNZ itself, since four of the seven members of the MPC will be full-time RBNZ staff, with Governor Adrian Orr chairing the committee.

Differences of opinion will be visible

But under the new structure, unlike the old system where the Governor was officially a sole decision maker, we will be able to discern if a decision has been a line call.

The MPC's official Charter says the MPC will “seek consensus in decision-making,” but when this isn’t possible, decisions will be determined by a majority vote.

The MPC will publish each monetary policy decision promptly on the RBNZ website and the announced decision of the MPC will include a summary record of the MPC meeting that includes an overview of the economic outlook, the risks and policy options discussed, any material differences of view or judgement, and an unattributed record of any vote taken.

However, there's pretty tight rules around what the committee members might be able to say publicly, so, we can't expect a situation where members who didn't agree with a decision then come out and say so publicly. The RBNZ was very keen to avoid such a situation and the idea of the committee becoming a "circus" was one of the concerns expressed ahead of its formation.

But circus or not, there's going to be plenty to entertain come next Wednesday. And we might get a rate cut thrown in as well. Can't wait.

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I'm not a fan of the Monetary Policy Committee at all. Less predictable. I feel like Orr was an open book and sent clear/dependable signals about what he was thinking. But now that these other jokers are involved, I'm less confident. Hopefully he can just whip the three RBNZ internal members if he needs to :)


Disagree . Orr has sent unclear messaging . The markets are of the same opinion. He , like a number of central bankers simply do not want to rock the boat at present and are changing course to suit any fickle prevailing groupthink. Globally ,bloody hell, look at the current OCR settings and turn the clock back to see how dependable central bankers are..
The RBA ,which decide the day before will determine what the RBNZ does,not Orr . With Japan back from holiday, the fx markets in antipodean currencies will resemble a polygraph test .

Well expressed Cowpat. Also, as we know, central bankers are one-trick ponies ideologically.

Can you give me an example of "unclear messaging" from Orr?

What if they surprise everyone and cut by 0.15%.

Where is the written rule that they must only ever cut or raise in 0.25% increments?

No rules just that all central banks have followed the same theme. And who would have thought that it would have been our success of 2% inflation targeting that lead Vreenspan and the world to target 2% CPI whilst neglecting credit growth and asset price inflation. I do hope we got everyone to sign a disclaimer that our advice may not hold forever and that past CPI targeting success is no guarantee of future economic stability.

Hasn't the 2% target been a sad and cruel policy? A median house in 1999 equaled 11724 hours work at median pay, now it equals 21032 hours. Exactly as you would expect.

"Economists at the country's largest bank ANZ broke ranks among the economists in a serious (and it turns out, correct) way late last year by coming out against the tide and predicting that the OCR would be cut to 1% by 2020. "

How exactly are they correct.. there has been no rate cut, let alone three 0.25% cuts to get to 1%?

And yet the bank economists wield such media power and influence?

I think he meant correct in terms of going against the grain of other bank economists by predicting a cut(s) in '19.

The taxpayer is to provide super cheap credit to Australian bankers so they can keep their profits high whilst building up their cash reserves.



Rising levels of mortgage delinquencies in Oz from both ANZ and BNZ, small increase but gathering pace. The banks know it’s coming here too so they will be really pressing for a cut. Tough call for Adrian and team, cut and the dollar falls and we have a lot of pressure on our marginal families with little room to bear imported inflation - not much leeway against an external shock in the future either. Don’t cut and the housing market continues to drift lower from Auckland out. I think we’ll see a cut soon but not sure if just yet, because so far, while the banks know there is a big problem on the horizon the figures (which are behind the curve) aren’t yet painting that picture to the RBNZ - if they delay, that May lead to a bigger cut later. I’m not sure if i’d Be as bullish on the kiwi dollar as Mr Kerr has been of late.

Interesting times to be considering rate cuts when everything was supposed to be so rosy.. Lending figures for mortgages will be the key and how soft kiwi appetite has become for ever increasing loan sizes? Just like Oz we’re an economy that lives on the adrenaline kick of the ‘credit impulse’ - but we don’t export as much.

Great comment!

Yes, I think the Aussies have shot themselves in the foot. Tightened credit into a downturn, and now house prices are falling. Does the trickle turn into a torrent? The BIS reckon house prices are sensitive to interest rates on the way up, but not on the way down. The lower interest rates are only available to new borrowers, not to those who have over borrowed. This is already the case in Aussie:

Should be interesting to see the political reaction to $3 petrol, then $4 petrol, then $5 petrol....

But what would have been the consequences in AU of not tightening credit? Looks more like they should have been lending more responsibly for quite some time now.

The RBA ?tightened? credit by reducing interest rates to the lowest level they have ever provided.

“You keep using that word. I do not think it means what you think it means.” – Inigo Montoya.

Not the RBA but the lending banks. As in, doing wacky things like whether people actually have the income to pay their mortgage etc. If they hadn't started to do these basic checks a bit more, what might have been the consequences of profligate lending further down the road?

That makes sense. The Aussies loosened credit to their banks, the banks tightened credit to their customers.

And thats what’s going to happen here, the ANZ has already in writing told its customers as such in the past week - as the OCR gets cut they will increase their margins by not passing it on, indeed likely more so than the cuts, until the RBNZ’s new capital requirements are accommodated - it will be the theme for the next few years and it will apply to all the banks.

Hi Joe,

listening to Eddie Hobbs I am convinced that the Self-fulfilling prophecy is now baked in: because buyers feel price will continue to drop , they will, because Agents cannot sell them and lean on vendors to cut price. Meanwhile the knife is still falling and sales continue to fall, hence also the knock on negatives of NOT getting all those purchasers borrowing even more money to furbish their place. This has only just started, yet in 2m RE NZ now tells us that asking prices have fallen 9% - at the height of selling season! In Hibiscus Coast, 4 of the 6 main suburbs have sold fewer in the last 7m, than they did in the same period in 2007-08. Orewa and Red Beach are exceptions because they sell lots of sections compared to others, and apartments in respect to Orewa. Orewa and RB of course area also major population growth areas in last 7 years, due to building. Some really interesting stats would be sales of NEW builds v existing stock and who is buying it. Of course, this is not available. I think we are headed for what Mauldin forecast - deflation followed by big inflation. So all banks will cut interest and try to boost exports and inflate import prices exactly as food prices are rising due to the USA disastrous flooding. Inflation will of course take everyone by surprise and banks dare not raise interest rates, so, inevitably that means that inflation will deflate economy further by eroding after tax earnings and propensity to spend. The circle is getting more vicious quite quickly. Mr Robertson, poor dear , thinks he will get 2.5% growth in next 12m. NO consideration of effect of selling 15-30% fewer houses on that of course.

House prices will respond FAR more to buyers going AWOL than any prospect of interest rate rises (which central banks are desperate to avoid as it raises cost of the massively inflated debt all and sundry now has. House price relates not to interest rate, not to population growth or supply but to 2 things:

1. What people are allowed to borrow
2. Whether people WANT to buy.

What is happening is that anyone who does not HAVE to buy is not going to.
So, price cuts occur to try to persuade them. But that encourages view that they will cut more. Repeat.