Odds against OCR cut

An OCR cut this week is a live call, but most economists think the Reserve Bank will wait a bit longer before cutting again.

Friday, April 22nd 2016, 11:44AM

by Miriam Bell

Anticipation is building as the countdown to the Reserve Bank’s OCR announcement next Thursday gets underway.

While the OCR is already at a record low of 2.25%, inflationary pressures are such that many economists are expecting a further cut, or cuts, to come.

Recent housing market data, which shows the Auckland housing market is gaining strength again, has complicated calculations.

But the overriding question remains when exactly the Reserve Bank might make the move.

And, since the Reserve Bank took many commentators by surprise with their 25 basis point OCR cut in March, the guessing game has got harder.

However, all but one of the economists who responded to the regular mortgagerates.co.nz survey expect the Reserve Bank to keep the OCR on hold at 2.25% next week.

The exception was BNZ’s Doug Steel who put 55% probability on the Reserve Bank cutting the OCR to 2.0% this week.

Steel then expects the Reserve Bank to cut the OCR by another 25 basis points to 1.75% in June, at which point it will trough.

Conversely, all the other responding economists think the OCR will be cut again in June – but to 2.0%, which many think will be the trough.

Such predictions are not an easy call to make though.

For Westpac chief economist Dominick Stephens it is a question of tactics on the Reserve Bank’s part.

“While the balance between economic data developments does lean in favour of further OCR reductions, tactical considerations make the hurdle for an April OCR cut quite high.

“We are not convinced that this hurdle has been cleared, particularly considering that the financial market developments driving the need to cut could prove fickle.”

For this reason, Westpac places just 25% odds on a cut this week and continues to regard June as the more likely date for the next OCR reduction.

“That said, we certainly expect the Reserve Bank’s commentary to acknowledge the balance of recent developments, and to provide a firmer easing signal to keep markets focused on falling interest rates.”

Westpac is forecasting only one more OCR reduction, but Stephens thinks the risk of the OCR eventually falling below 2% is mounting.

“We suspect that the RBNZ will want to observe how the exchange rate, mortgage rates, and the housing market evolve before deciding on whether the OCR is likely to fall below 2%.”

If the Reserve Bank does cut this week, it has already decided that it is going to have to drop the OCR below 2% and will cut again, he added.

The Reserve Bank’s move this week will come down to whether it is more concerned about house prices or the currency, ASB chief economist Nick Tuffley said.

“Since the March MPS, there has been a growing risk that inflation will remain low for longer, the NZD has been more resilient than even we have expected, and a reheating Auckland housing market is complicating the picture.

“Further OCR cuts risk stoking the housing market even more, so waiting until June gives the RBNZ time to address housing risks more formally in May’s Financial Stability Review.”

As a result, ASB are just leaning to a June cut, but April’s OCR review remains a line-ball call, he said.

“If the Reserve Bank doesn’t cut the OCR, we would expect a firm easing bias, similar to October. But tougher talk on the NZD is likely.

“And, even with an OCR cut, we still expect the Reserve Bank to maintain a soft easing bias.”

Tuffley also said an OCR this week would firm ASB’s view that the OCR will fall to 1.75% in June.

However, ANZ chief economist Cameron Bagrie was not buying into the notion that recent developments, particularly the rising NZD, bring an April cut into play.

ANZ sees the Reserve Bank holding the OCR at 2.25% next week, and they consider it far from a forgone conclusion that the OCR will be cut again in June, he said.

“That said, we expect dovish nuances and a firm easing bias to remain – an implicit hat tip to NZD strength.”

For now, a solid domestic economic backdrop means there is little urgency to cut the OCR, Bagrie said.

“We are nonetheless retaining our view that the OCR will indeed be lowered at some stage going forward. We put the probability of a June cut at 60%.

“The combination of dairy pressures, likely renewed global unease, elevated NZD, the pending higher average cost of funds for banks and a likely further prudential policy response towards housing are powerful forces keeping rate cuts on the table.”

Tags: ANZ ASB banks BNZ OCR OCR forecasts RBNZ Westpac