Westpac Institutional Bank Team
Westpac Institutional Bank
The Reserve Bank has honed in on the woes of the dairy sector, judging that they pose such a risk that an immediate OCR cut was warranted. The only question now is the timing of further cuts – we see one more cut in September as the most likely scenario, but all will depend on the next few dairy auctions.
The Reserve Bank surprised much of the market, including us, by reducing the OCR by 25 basis points to 3.25% at last week’s Monetary Policy Statement.
While the case for interest rate cuts this year was growing, we didn’t expect the Reserve Bank to move so soon, given the conditions it had laid out in its April review. Based on those previous signals, the Reserve Bank was readying itself to cut the OCR if domestic demand weakened, and wage and price-setting outcomes settled below the inflation target. On both fronts, we felt the evidence to date was still too inconclusive for the Reserve Bank to move without preparing markets appropriately.
But in the event, the Reserve Bank judged that the current weakness in global dairy prices presented a sufficient risk to domestic demand over the coming months that cuts were needed now to bring inflation back to 2% within an acceptable time-frame.
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