Odds are on an OCR cut
Expectations of a cut to the OCR next week are riding high – although some economists have divergent theories.
Friday, December 4th 2015, 9:22AM 
2 Comments
by Miriam Bell
Most of the economists who responded to a mortgagerates.co.nz survey think the Reserve Bank will cut the OCR by 25bps to 2.5% next week.
Just one survey respondent, Forsyth Barr’s Matt Sturmer, is expecting the RBNZ to keep some ammunition in its tank and hold the OCR at 2.75%.
However, ANZ chief economist Cameron Bagrie has also said that he is not joining the chorus for an OCR cut next week - despite there being good grounds for a cut.
In his view, the justification for a cut next week is not that clear cut.
This is due to the improving domestic growth and terms of trade outlook, housing market considerations, ongoing falls in fixed mortgage rates, and the need for more global clarity.
“Our core view is that improving signs on the local economic outlook should be respected, seeing a pause – a view that is notably out of consensus,” Bagrie said.
“Given the factors listed above and the need to manage expectations going forward, we think there is some benefit for the RBNZ in ‘watching and waiting’ a little longer.”
He added that, should it occur, a cut next week would not be overly surprising or something to quibble about.
While Bagrie and Sturmer don’t think a cut is on the cards next week, they both believe the RBNZ will make another 25bp cut to the OCR, to take it to 2.5%, at some point in 2016.
All but one of the survey respondents expected the OCR to trough at 2.5%.
Going against the grain, ASB chief economist Nick Tuffley thinks the trough will be 2% in August 2016.
He said there was an 80% probability of a cut to 2.5% next week and that the trigger for future cuts would be the RBNZ revising down its assessment of future inflation pressures.
Earlier this week, ASB’s economists said they believe the medium-term inflation outlook is likely to be much weaker than the RBNZ expected in September.
For this reason, they think that, along with a cut next week, the RBNZ will be cutting further in mid-2016 to bring the OCR to a low of 2%.
While NZIER senior economist Christina Leung expects the OCR to trough at 2.5%, she will be watching out for comments from the RBNZ that they have the appetite to take it lower.
But Robin Clements, from UBS NZ Ltd, said that, if there is a cut, the RBNZ is likely to water down the easing bias.
“So rather than saying 'some further reduction in the OCR seems likely', they will say something like 'some further reduction in the OCR is possible', with this still conditional upon 'the emerging flow of economic data'.”
Westpac chief economist Dominick Stephens also thought the RBNZ’s language in its decision would be interesting.
In his view, next week’s decision fits into the uncertain variety, but the most likely outcome is a 25bps cut, with no commitment on future OCR changes.
If the RBNZ does cut next week, then the accompanying statement will seek to avoid commitment, he said.
“In particular, it is unlikely to remove the possibility of further rate cuts by signalling a ‘period of stability’, for fear of markets overreacting and the exchange rate rising. Neither would we expect the RBNZ to adopt an explicit easing bias.
“Instead, we expect the RBNZ to adopt language that is open to either keeping the OCR on hold or reducing it, such as ‘future OCR decisions will depend on the emerging flow of data’.”
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