RBNZ likely to hold rates steady – BNZ

RBNZ is expected to hold OCR steady on Thursday, amid generally softer than expected data, according to Doug Steel, Senior Economist at BNZ.

Key Quotes

“Thursday’s RBNZ Monetary Policy Statement (MPS) sits head and shoulders above anything else on the local calendar in the coming week. We expect no change in the OCR, but there is a lot to consider.”

“Given all that has occurred since the May MPS, we see broad downward pressure coming on the Reserve Bank’s inflation forecasts. In the first instance, this stems from a new, lower, starting point needing to be included as Q2 CPI undershot expectations. Recall that annual CPI inflation came in at 1.7% in Q2, below RBNZ forecasts of 2.1%. Core inflation measures also slipped a bit. Secondly, more downward pressure on RBNZ inflation forecasts will result when the stronger-than-expected NZD feeds into the projections. The TWI is currently tracking more than 3% above previous RBNZ projections.”

“Meanwhile, the housing market has been cooling under LVR restrictions and mortgage rates have been increasing independent of the OCR. For the latest on the housing market, keep an eye out for July’s REINZ housing report that might see the light of day before the week is out and, if so, will probably reinforce the recent cooling tendencies. To date, the RBNZ has been more wary of a recharge in the housing market than showing any concern about the market potentially cooling more than anticipated.”

“Overall, the chance of a mid-2018 hike is diminishing. At the very least, the balance of information suggests it is highly unlikely that the RBNZ would move to a hawkish stance from its firmly neutral position in May (and maintained in June). Indeed, it’s almost certain we will push out our own May 2018 rate hike call but will wait for Thursday’s MPS before making a final decision on that.”

“We don’t think the RBNZ will cut. There was no clear sense of material movement away from the Bank’s neutral stance in a recent speech by RBNZ Assistant Governor and Head of Economics, John McDermott. While the Bank might feel the need to respond to the recent information flow with an easing bias – and there is a risk it does – we believe it will prefer to stick with its on-hold message for the meantime. So we shouldn’t expect much, if any, change to the Bank’s central cash rate projections, which, recall, were dead flat out to mid-2019 in the May Statement.”

“We wouldn’t be surprised to see previous guidance being maintained ‘Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly’. The risk, however, is for something that looks a bit more dovish. But as stated, the current guidance would keep the Bank’s future options open. Note it is RBNZ Governor Graeme Wheeler’s final MPS before his term ends on 26 September.”