Odds of rate cut in August drop after RBNZ warns on housing

The odds of a cut in the official cash rate by Reserve Bank of New Zealand at its August 11 meet dropped to 40 percent in Wellington Friday from as much as 70 percent earlier this week following the central banks comments regarding the housing market.

The RBNZ had said earlier this week that further reductions could pose a risk to financial stability by throwing fuel on an overheated housing market. Reserve Bank of New Zealand Deputy Governor Grant Spencer said late Thursday that the bank needs to carefully consider risks to financial stability when deciding the future path of monetary policy.

The central bank noted that while record-low borrowing costs are stoking housing demand, general inflation of just 0.4 percent remains well below its 1 to 3 percent target. Also lower interest rates are driving up the New Zealand dollar and suppressing import prices, making attainment of the 2 percent target midpoint even more elusive.

Westpac forecasts an August cut, arguing the strong NZD dominates the heated housing market. ANZ Bank New Zealand chief economist Cameron Bagrie said Friday, “We now expect the RBNZ to hold fire and leave the OCR unchanged in August.”