RBNZ likely to leave policy rate unchanged at 1 pct next Wednesday, says ANZ Research

The Reserve Bank of New Zealand (RBNZ) is expected to  leave the Overnight Cash Rate (OCR) unchanged at 1 percent at its monetary policy meeting scheduled to be held next Wednesday, indicating that they expect to sit on the side-lines for the time being, but that they are watching emerging global risks closely, according to the latest report from ANZ Research.

They will acknowledge the human impact of the tragic new coronavirus, with cautious language about possible risks to the economic outlook. Domestic conditions give the RBNZ scope to wait and see how developments unfold.

The OCR track is expected to be broadly unchanged, despite a stronger domestic backdrop. The economic impacts associated with the outbreak are highly uncertain and are likely to sit largely in the ‘risks’ basket for now.

But a short-term negative impact on GDP growth, commodity prices and global wholesale interest rates may feature in the central forecast. Exactly how they incorporate it won’t matter too much – any forecast will be out of date in a week.

There are clear signs that the housing market is responding vigorously to previous cuts, fiscal policy is set to underpin the medium-term outlook, and core inflation pressures are rising. Inflation and the labour market are both in a good position. So the Reserve Bank will be comfortable going back to its familiar “wait and see” mode, the report added.

But risks associated with the new coronavirus will be weighing on the RBNZ’s thinking and feature heavily in their discussion, if not the central forecasts. It is far too early to assess the impacts of the outbreak and associated disruption.

So for the most part, developments are expected to sit predominantly in the “risk” basket, with strong emphasis on the enormous uncertainty at present. Only modest impacts are likely to feature in the central projections; a near-term dent to GDP (largely via goods and services exports) and the recent decline in dairy prices may feature as specific changes, along with lower global wholesale interest rates.

"We expect some rather cautious wording in the MPS about emerging risks, potentially with a discussion of possible channels, notwithstanding considerable uncertainty. Overall, we expect the OCR track will be broadly unchanged, but with some signalling that the OCR could go lower if required," ANZ Research further commented in the report.