South of Neutral OCR?

After starting with a 25 basis point cut in June, the RBNZ continued the easing cycle with another 25 basis point cut at its July OCR Review, but cautioned the market pricing too much more easing. 

At the time of the June Monetary Policy Statement, the RBNZ had hinted that “further easing may be appropriate”, leaving another 25 basis points or so of further cuts in their forecasts for the next 12 months.  Economic data over the course of the month reinforced the idea that growth in the NZ economy was moderating further, and that the easing cycle would continue.  Business confidence surveys softened noticeably, and non-tradeable inflation at its lows underlined the absence of domestic inflationary pressures. 

However, the key news came from dairy prices which continued to fall sharply in July, prompting the market to bring forward its expectations, and price more action from the RBNZ, more quickly than previous forecasts.  While the current level of dairy prices will be hurting the cash flow of farmers, the greater risk is prolonged period of low dairy prices, hurting the economy and financial sector.   

While the RBNZ did deliver a 25 basis point cut to 3.00% in July and signal that “some further easing seems likely”, it was quick to water down expectations that the OCR would eventually fall below its record low level of 2.50%.  In a speech soon after the decision, the Governor highlighted that to forecast aggressive OCR cuts the RBNZ would need to be forecasting a recession, which it is not seeing at the moment.  In fact, the RBNZ isn’t really even forecasting a slowdown at all – more a case of the economy continuing to grow at 2% to 3%.