Odds on for an August cut

Lower than expected inflation has economists predicting another cut to the official cash rate.

Monday, July 18th 2016, 5:14PM

Whether the bank would move at its next meeting had seemed less clear after a speech this month in which it was made clear that house prices were a concern, and it was acknowledged that low interest rates were partly responsible for fuelling that.

But new data shows that the consumer price index only rose 0.4% in the year to June 30, compared to Reserve Bank forecasts of 0.6%.

Jonathan Williams, of HSBC, said there was a significant policy challenge ahead for the Reserve Bank.

"While inflation remains too low and the recent rise in the NZD is likely to mean downward revisions to the RBNZ's inflation forecasts, the financial stability risks of low interest rates are rising due to the booming housing market," he said.

"Although the booming housing market could make the RBNZ more reluctant to cut further, our view remains that the RBNZ will keep its cash rate setting focused on the inflation target and will use macro-prudential tools to deal with risks in the housing market. With this in mind, our central case sees the RBNZ cut its cash rate by 25bps to 2% in August."

ASB said it too was picking an August cut to 2%.

"Much of the ‘surprise’ in the recent inflation data was due to soft tradable inflation. With the NZD lifting strongly over June and July, tradable inflation will remain very weak for some time and further prolong the return of inflation back to the middle of the target. Meanwhile, beyond construction costs and Auckland rents, there was very little evidence of broad-based increase in domestically-sourced inflation pressures."

Ben Jarman, of JP Morgan said it was hard to be confident about the direction of the OCR, because there was such a sharp trade-off for the bank to navigate beween price stability and financial stability.

"But today's data will likely aid a dovish tilt, and supports the case for an easing in August as we expect."

Tags: OCR OCR forecasts Reserve Bank