A turn for the worse

Last week the Reserve Bank reduced the OCR a quarter of a percentage point to 3.0%, and firmly signalled some further reduction with the following policy guidance sentence:

“At this point some further easing seems likely.”

This was less conditional than June’s “We expect further easing may be appropriate. This will depend on the data.” We take this to mean that the RBNZ will cut the OCR again in September. But beyond that there is no way to be sure what the RBNZ is intending to do.

The reasons given for the Reserve Bank’s change of stance were falling global dairy prices and an assessment that the Canterbury rebuild has peaked. On both fronts, we concur. We have discussed both topics in recent weeks, but both are important enough to warrant further emphasis.

Immediately after the last dairy auction we revised our forecast for this season’s farmgate milk payment to dairy farmers to $4.30 per kg of milksolids. But over the past week we have observed yet another sharp drop in dairy futures prices, and we have had a chance to thoroughly assess the outlook. It is looking increasingly likely that we will reduce our farmgate milk price forecast below $4.00. Open Country, a smaller dairy processor, has already come out with a forecast of $3.65 to $3.95.

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