OCR cuts to come – but not now
Inflation forecasts are the key theme in economists’ predictions for Thursday’s official cash rate call from the Reserve Bank.
Monday, January 25th 2016, 10:52AM 
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by Miriam Bell
Predictions of further cuts to the OCR have been circulating for some time, but every economist who responded to the regular mortgagerates.co.nz survey believes there will be no cut this week.
This rare unanimity was backed up by the economists mortgagerates.co.nz spoke to and a flurry of releases from bank economists.
The OCR is already at a record low of 2.5% - following the RBNZ’s cut in December.
In December, the RBNZ said further cuts were unlikely as its felt that rate would allow it to achieve its goal of getting inflation back into its 1% to 3% target range.
However, most of the economists’ mortgagerates.co.nz heard from commented on New Zealand’s weaker than expected inflation and cited this as a reason that the RBNZ will need to cut later in the year.
Both ASB chief economist Nick Tuffley and Westpac chief economist Dominick Stephens predicted that the RBNZ will deliver two cuts, of 25bp each, in June and then August this year.
HSBC chief economist Paul Bloxham was also picking two 25bp cuts this year, starting in the second quarter.
Bloxham said CPI inflation ended 2015 at just 0.1% year-on-year, which was the lowest rate in over 15 years and a material downside surprise to the RBNZ's forecasts.
“Continuing oil price declines threaten to tip New Zealand into outright deflation (in annual terms) during 2016. With inflation close to zero and well below target, the odds of another rate cut have risen.”
He did not expect the RBNZ to cut on Thursday for several reasons.
One of these was the cautious attitude it adopted during the second half of 2015, which means it will want to pause and judge the effects of the 100bps of cuts delivered last year for some time.
Further, New Zealand’s economy doesn’t appear to be at risk of a near term slowdown in growth and the RBNZ is expected to “'look through” much of the weakness in Q4 CPI inflation, he said.
“But, even ignoring the oil price impact, we believe inflation pressures will remain too low for the RBNZ to credibly project a return to 2% average inflation over the medium term, forcing them to act.”
Tuffley said inflation pressures were proving to be more subdued than the RBNZ thought they would be in the December statement.
The weak fourth quarter CPI result and ongoing weakness in oil prices were examples of this.
In his view, the RBNZ will either take a while to realise this and then act on it, or they will continue to think inflation will rebound.
Circumstances should be prompted a rethink from the RBNZ and markets are already pricing in a high chance of a March cut and fully pricing a 25bp cut by June, he said.
“We think the January OCR review is a little too soon to get a clear signal the RBNZ will cut as early as March, but even so both the March and April OCR windows are now ‘live’.”
Due to the ongoing financial stability concerns, the housing market will play a role in the RBNZ’s considerations, he added.
“If the Auckland market is slowing down, the RBNZ will feel more comfortable with the margin to cut. But if it remains red-hot, that will be less the case.”
Stephens said the RBNZ may take the opportunity this week to remind markets of what it said back in December.
This was that while the RBNZ expects that current interest rate settings will be sufficient to achieve its inflation target, it will “reduce rates if circumstances warrant”.
“We think this will be the case by June. And markets are starting to agree. Already there is around a 50% chance of a rate cut priced in by then.”
While a cut this week is highly unlikely, Stephens said the latest inflation data did raise the risk of a cut in March rather than June.
Meanwhile, some of the economists who responded to the mortgagerates.co.nz don’t see cuts in the works this year.
NZIER senior economist Christina Leung believes the RBNZ will make no changes to the OCR until December 2017 when it will raise it by 25bps.
The OCR has troughed and it would take a global meltdown of GFC proportions to prompt a cut, she said.
“In this week’s statement, I will be looking for comments on how the RBNZ is balancing global risks against the risks from asset price bubbles.
“Headline inflation is weak but it largely reflects weak tradable inflation - non-tradable inflation actually surprised on the upside and core measures are picking up.”
Infometrics Ltd economist Mieke Welvaert agreed that the OCR has troughed.
She thinks it will stay at 2.50% until November 2016 when the RBNZ will hike it by 25bps – although a sharp slowdown in China’s economy could cause a cut.
“This week it will be interesting to see what the RBNZ’s comments on the housing market and how it proposes to assess the risks going forward.”
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