RBNZ unlikely to adopt any change in OCR outlook; markets to draw cues from new Governor Orr’s speech

The Reserve Bank of New Zealand (RBNZ) is not expected to adopt any changes in its outlook for the Overnight Cash Rate (OCR) in its monetary policy meeting scheduled next week; but if there is a change, it will be in the direction of slightly earlier hikes than previously signalled, according to the latest report from Westpac Research.

For over a year now, the Reserve Bank has consistently delivered the same message. Inflation is too low, and the OCR will remain low until that is rectified. In its last communique the RBNZ expected that would mean keeping the OCR at 1.75 percent until mid to late 2019, but like all forecasts, that is subject to change.

Recent economic developments have been, on balance, slightly positive for inflation. The exchange rate has dropped sharply below the RBNZ’s forecast, the housing market has been stronger than the RBNZ expected, and export commodity prices have risen instead of falling as the RBNZ anticipated. That is more than enough to offset the fact that GDP growth has probably been weaker than the RBNZ expected in the six months to March.

However, in Australia and the United States, there have been much larger rises in bank bill rates, and the fear is that New Zealand could follow suit. If bank bill rates remain elevated mortgage rates might be pushed up independent of the OCR. And that would reduce even further the RBNZ’s desire to lift the OCR.

"If the OCR outlook is upgraded to slightly earlier hikes, markets would respond by sending swap rates a few basis points higher. The NZD might also rise slightly, particularly if the RBNZ mentions directly the recent fall in the exchange rate. However, the NZD is in such a powerful downdraught at present that any rise in the exchange rate would be short-lived," the report added.

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