The plot thickens

There has been plenty to mull over in the past week, including the recently announced new property tax rules, a mildly stimulatory Budget, and surprisingly resilient inflation expectations. We remain firmly of the view that an OCR cut in June is unlikely, although where the OCR heads later in the year is a closer call.

In its April OCR review, the RBNZ stated that it would keep the OCR on hold unless the domestic economy cooled and wage and price setting behaviour settled below the 2% inflation target, in which case it could reduce the OCR.

With that in mind, recent developments have given both proponents and sceptics of OCR cuts plenty to chew on. On the one hand we have had the Government’s announcement of tighter property tax rules and another weak dairy auction. But we also had surprisingly resilient inflation expectations, continued very strong migration, and a Budget that was on the stimulatory side of expectations.

The biggest new developments are the proposed property tax changes and the inflation expectations surveys. The former has created fresh risks around the domestic economic outlook – though we tentatively believe the impact on the housing market will be fairly limited. Meanwhile, the expectations data have allayed fears around New Zealand wage and price setting trends, at least for the time being.