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.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.