Tactical guessing game
Reasons for the Reserve Bank not to cut the OCR in June are compelling but it’s a guessing game, according to some economists.
Tuesday, May 24th 2016, 2:22PM
by Miriam Bell
Until recently, it seemed there was near consensus among economists that the Reserve Bank was likely to cut the OCR again in its next announcement on June 9.
But, as mortgagerates.co.nz has reported, it seems that consensus may be changing, as a range of different factors impact on the situation.
ANZ’s base case remains that further Reserve Bank easing is likely, but there is little immediate urgency to cut.
The bank’s chief economist Cameron Bagrie said the market is increasingly coming around to the same view.
“Pricing for a June cut has fallen from around 80% two weeks ago to around 25% now, while a rate cut is now only 56% priced by August, which is consistent with our view of the risk profile. We put the odds of a move in August at 60%.”
He struggled to see the urgency for a cut – despite low inflation expectations and rising unemployment – because of a set of stark realities.
These include the booming housing market, little sign of weakness in the economy (apart from dairy), and, currently, a less worrisome global scene.
While dairy is a problem, housing is a bigger one, Bagrie said.
“Pouring more fuel on that fire hardly makes sense. While financial stability and monetary policy are separate in theory, their impacts clearly overlap.”
“With housing affordability now front and centre, the Reserve Bank is doing the government few favours by cutting rates and fuelling more speculative fire.”
Despite such factors, ANZ are still picking a lower OCR, but further down the track.
This is because credit growth is outstripping deposit growth, the persistently high NZD and future fireworks on the global scene.
BNZ economists also believe that rate cuts at this stage of the economic cycle are unwise.
This is because the economy is growing near trend, the labour market is strong, credit growth is accelerating, the housing market has heated up again, household debt-income ratios are pushing record highs and core inflation is within the target band.
However, the bank’s head of research, Stephen Toplis, said the Reserve Bank has delivered a strong message that it intends to push the OCR lower still.
In his view, the Reserve Bank adopted a “tactical” decision to leave the OCR on hold at 2.25% in April in order to maintain the pretence its future flexibility to cut would be limited if it didn’t.
“If the Reserve Bank is to stay tactical then the argument for no move in June becomes significantly heightened and, in many ways, justifiably so.”
But picking the timing of Reserve Bank actions, and understanding the logic of that timing, has proven difficult, Toplis said.
“We believe the Reserve Bank shouldn’t cut rates because the costs of doing so outweigh the benefits.
“Consistency with the March and April reviews says it should, but if the ‘tactical’ argument wins out, it won’t.”
For this reason, and with trepidation, BNZ has shifted to a no-cut June, cut August call, Toplis said.
“Our conviction will diminish if the NZD rises and/or the market moves to more aggressively price it in.”
| « Inflation concerns could mean June cut | Budget unlikely to change Reserve Bank views » |
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