RBNZ: Continue to call for a further rate cut in 2017 – Deutsche Bank

Research Team at Deutsche Bank, continues to call for a further RBNZ rate cut in 2017, leaving a ‘terminal’ cash rate this cycle of 1.5%.

Key Quotes

“We continue to expect the RBNZ to take the cash rate lower in 2017, with a further 25bp easing, likely in May. To be sure, further easing is not reflected either in market pricing or the RBNZ’s own projections for the OCR as outlined in the November Monetary Policy Statement.” 

“Our call is predicated on two factors. The first is the exchange rate. Amid expressing ongoing discomfort about the strength of the currency, the November MPS looks for the trade-weighted index to depreciate in 2017, unwinding much of the appreciation seen through 2016, and this will likely be necessary to mitigate the disinflationary impulse from the tradables sector. We are cautious about the prospects for this.”

“What course policy in the United States and Australia ultimately takes through 2017 is likely to prove just as (if not, more) important for the evolution of the TWI than domestic factors. And while the recent US presidential election result has seen our US-based economists revise higher their outlook for economic growth, the expected Fed policy response next year remains fairly muted with just two additional hikes (a more aggressive Fed profile emerges in their view in 2018). If the Fed proves reluctant to hike more aggressively than priced, material downside pressure on the NZ TWI would seem unlikely to materialize. Similarly, we continue to see further easing by the RBA in 2017 amid weakness in domestic inflationary pressure. Moreover, the recent rebound in dairy prices can be expected to limit downside pressure (though a key risk will be whether higher dairy prices are ultimately sustained).”