RBNZ MPS preview: OCR decision is a close call

Some OCR decisions are clear cut affairs, and others are uncertain right through to the last minute. Next week's December Monetary Policy Statement is of the uncertain variety, which will make it a key event for markets. The OCR is currently 2.75%, and the RBNZ's forecasts and communications have all indicated that it sees 2.5% as the low-point in the current OCR cycle. That means the RBNZ expects to deliver only one more OCR cut. 

Next week's OCR decision comes down to whether the RBNZ wants to fire what it sees as its final bullet, or whether it wants to keep its powder dry. The most likely outcome is a 25 basis point OCR cut. The RBNZ held off in October, but since then the situation has evolved more clearly in a direction favouring OCR cuts. Reasonable arguments can still be constructed for either immediate action or for waiting. 

But on balance, the arguments for cutting immediately are more compelling. If the RBNZ does cut next week, then the accompanying statement will seek to avoid commitment. In particular, the RBNZ is unlikely to remove the possibility of further rate cuts by signalling a "period of stability", for fear of markets overreacting and the exchange rate rising. Neither would the RBNZ is expected to adopt an explicit easing bias. 

Instead, the RBNZ is expected to adopt language that is open to either keeping the OCR on hold or reducing it, such as: "Future OCR decisions will depend on the emerging flow of data." Presumably the context of the Monetary Policy Statement, including the usual alternative scenarios, will make it clear that OCR hikes will be off the table for a long time. 

The RBNZ may even go as far as to emphasise that point in the press release, by saying something along the lines of: "The OCR is expected to remain low for some time." 

"We consider it less likely, but not inconceivable, that the RBNZ will leave the OCR unchanged next week, but will firmly signal that a cut is likely in the months ahead", says Westpac Research.