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The Reserve Bank of New Zealand (RBNZ) is expected to leave the Official Cash Rate (OCR) at 1.75 percent; however, a dovish tone is expected, in line with the March OCR Review, and a downward-sloping OCR forecast track implying around 35bp of OCR cuts by the end of the year, according to the latest report from ANZ Research. Domestic data has confirmed the economy is cooling but hardly freezing up.
Near-term risks around China’s growth – and hence commodity prices – are diminishing. There is no urgency for RBNZ action.
The March OCR Review included a comment that being out of synch with global central bank peers could place upward pressure on the NZD. A weak Q1 core inflation print in Australia has now seen the market price in the chance of a cut by the RBA next week at 40 percent, down from just over 60 percent at its peak.
The timing of the two meetings is very close, but at the margin, an RBA cut would raise the odds of the RBNZ following suit.
The Committee will discuss the likely market reaction to a cut or the lack of one. The market is undecided on the matter; analysts, however, are tilted firmly in favour of a cut. The Governor has made it clear that meeting market or analyst expectations is not something he feels obliged to do; however, the RBNZ is likely to prefer the NZD not to leap higher on the day. The words of the Policy Assessment and the nuances of the projections will need to be carefully chosen, the report added.
The state of the labour market warrants a deeper discussion, given “supporting maximum sustainable employment” is in the remit of the monetary policy committee. A ‘dovish’ take would focus on the fall in employment and soft wage growth.
A ‘hawkish’ read would centre on the low unemployment rate and business surveys that continue to indicate shortages in skilled and unskilled labour (ie pipeline wage inflation). There was something for everyone, in short, but looking through the noise, the claim that employment remains around maximum sustainable levels continues to be valid, for now.
"Nonetheless we are forecasting an OCR cut in August, with two more to follow, as it becomes incontrovertible that capacity pressures are waning meaningfully before core inflation is where it needs to be," ANZ Research further commented in the report.
