RBNZ likely to leave OCR on hold at 1.00 pct next week, leave door open to further cuts: ANZ Research

The Reserve Bank of New Zealand (RBNZ) is expected to leave the Overnight Cash Rate (OCR) on hold at 1.00 percent at its monetary policy meeting next Wednesday, but leave the door open to further cuts, according to the latest report from ANZ Research.

The Bank will most likely want to let the dust settle a little following August’s surprise 50bp move, but with this pre-emptive Committee nothing is certain.

The central bank will reaffirm its willingness to cut further should the outlook warrant, but it will also want to assess how earlier stimulus is transmitting though the broader economy before moving again. On net, developments since the August MPS are unlikely to have been significant enough to move the dial for the RBNZ yet, the report added.

There’s plenty for the RBNZ to worry about, with downside risks having intensified in recent months. The Reserve Bank’s August 50bp cut hasn’t caused any discernible improvement in business or consumer confidence, or inflation expectations indicators. Since the August MPS:

• The global outlook has deteriorated further. The RBNZ’s global growth outlook is due for a downgrade, with broad-based weakness in NZ’s trading partners in Q2. And it doesn’t look like things are likely to get any better in the remainder of the year.
• Forward-looking activity indicators suggest that the RBNZ’s forecast growth acceleration over the next few quarters is not going to eventuate.
• Inflation expectations in our survey, which have tracked the RBNZ’s preferred measures well in recent years, have slipped further.
• The expected fiscal stimulus may not come through as fast as the RBNZ needs it to – the KiwiBuild reset and push back in some infrastructure spend may have the RBNZ questioning the degree of fiscal stimulus in their forecasts.

That said, there are a few reasons the RBNZ will nonetheless probably feel comfortable sitting this one out for now, preferring to watch and wait:

• The NZD is tracking lower that the RBNZ expected at the August MPS. However, the NZD is only lower because more rate cuts are expected, so the RBNZ should discount this a bit to avoid double-counting.
• The solid Q2 labour market report may indicate that capacity pressures are holding up a bit better than expected. But the focus will be kept on the outlook – the deterioration in both surveyed employment intentions and job ads suggests that the labour market won’t stay this tight for long.

"But looking ahead, we’re confident that an OCR of 1 percent will not be the low of this cycle. The weak global outlook, gloomy business activity picture, and changes to bank capital requirements are likely to add further headwinds that a lower OCR will need to try and offset. We continue to expect 25bp cuts in November, February, and May to take the OCR to 0.25 percent – around its useful limit," ANZ Research further commented in the report.