RBNZ to cut even further on plunging dairy prices

At today's GlobalDairyTrade auction, dairy prices fell 10.7%. Fonterra's milk payment to farmers is forecasted  to $4.30 /kg, which is lower than last season's $4.40. A few hours later inflation figures were, once again, softer than expected.

"The RBNZ is expected to reduce the OCR to 2.0% by the end of this year. This will involve one reduction of 50bp - most likely in September, but possibly as early as next week's July OCR Review. At the other three meetings, 25bp reductions are expected in the OCR", says Westpac.

These are all very material developments, and they suggest that the RBNZ has a great deal of extra work to do in order to return inflation to 2% on a sustained basis. The RBNZ will reduce the OCR to 2.0% by the end of this year (previously 2.5%).

RBNZ's forecast for each OCR Review is as follows:July: -25bpSeptember: -50bpOctober: -25bpDecember: -25bp

A risk is seen that the 50bp reduction could come as early as July. However, at this stage it is more likely that the RBNZ will cut 25bp in July, and 50bp in September. The strong state of the housing market may be the factor that prevents a 50bp reduction in July. By contrast, the faltering economy to have dented the housing market by September.

"In addition, July is only a one-page OCR Review whereas September is a full Monetary Policy Statement the RBNZ may prefer to wait for a full communication opportunity before taking bold action", added Westpac.