Rates held, but growing chance of a cut

MPS Preview: Economists are united in their view that New Zealand’s Official Cash Rate will remain on hold at 2.5% next week, although some say there is a growing chance of a rate cut.

Friday, November 30th 2012, 8:48AM

by Susan Edmunds

New Reserve Bank Governor Graeme Wheeler will make his second OCR announcement and first Monetary Policy Statement (MPS) on Thursday.

The 15 economists surveyed by www.mortgagerates.co.nz all said they expected the rate to remain on hold, although several said there was a growing chance of an OCR cut over the next year.

Westpac’s Dominick Stephens said there was a 30% chance of a rate cut within the next 12 months. “But we think the most likely scenario has the OCR staying unchanged until September 2013.”

Jane Turner, of ASB agreed. She said there was a 30% chance that deterioration in offshore conditions could push the rate down in the next 12 months.

Because it is Graeme Wheeler’s first MPS, Turner said she was interested in his view on how to balance the strong housing market, particularly in Auckland, with the near-term weakness in inflation.

FNZC’s Chris Green put the likelihood of a 25 basis point cut over the next year at up to 40%.

He said factors making that cut increasingly likely included sharp deterioration in global growth, particularly a sharp weakening in China, the continuing strength of the New Zealand dollar, combined with signs of sharp deterioration in the domestic activity and weakening in commodity prices.

But ANZ’s Cameron Bagrie said things were not bad enough to prompt a rate cut. “For a rate cut you need the global scene to implode and the Christchurch rebuild to be pushed back further.”

Gareth Kiernan, of Infometrics, agreed: “We would need a substantial deterioration in financial market conditions in Europe and/or a significant worsening in growth prospects for China before we think rates would be cut.”

Several economists want more information from Wheeler on his view of the high Kiwi dollar.

Paul Bloxham, of HSBC, said finding out how worried he was about the exchange rate would be important. “We will also be interested in his first set of inflation forecasts and what they may imply about the future direction of policy.”

All of the economists agree the most likely scenario is that the next OCR move will be up by 25 basis points.

TD Securities expects that move to happen in March, FNZC puts it in December next year, HSBC expects it in the second quarter of 2013, JP Morgan expects it in the third, and Bancorp, NZIER and ANZ don’t expect it until March 2014.

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