RBNZ likely to cut OCR by 25bps at upcoming policy meeting, says ANZ Research

The Reserve Bank of New Zealand (RBNZ) is expected to cut the Official Cash Rate 25bps to 1.25 percent at its Official Cash Rate Review next Wednesday. The projections are expected to leave the door open to another cut, which is anticipated to be delivered in November, according to the latest report from ANZ Research.

House prices are now falling at the national level on a quarterly basis – we expect a lower forecast for house price inflation and hence consumption. Log prices have crashed; dairy prices have dipped; oil prices are a little lower.

The TWI has been up and down but has remained supported despite the weaker domestic growth outlook and softer commodity prices. Although the exchange rate is a contrary beast that can turn on a dime, that matters, particularly since it reflects lower interest rates abroad rather than good dataflow for the New Zealand economy.

At some point the RBNZ is likely to assume the neutral OCR has fallen, but it is difficult to know when this may affect the forecasts. The small positives (a bit more fiscal spending, possibly a slightly more positive output gap starting point) were largely discounted at the OCR Review, the report added.

Although the labour market remains tight, forward indicators for employment (eg employment intentions, job ads) have dropped markedly.

"Signals for Q2 GDP growth are weak – we have pencilled in just 0.4 percent quarterly growth, versus the RBNZ’s May forecast of 0.7 percent. We suspect the RBNZ will also trim their optimistic forecasts of a sharp bounce-back in the second half of the year, given the state of business sentiment," ANZ Research further commented.