Note: this report was prepared before the 7.1 magnitude earthquake that struck the Canterbury region over the weekend. Please see our Bulletin “Shaky isles” for our assessment of the economic impact of this event.
We have shifted our forecast to no change in the OCR in September and October. Nearly all economists are now picking a pause next week, and interest rate markets are pricing only a one in four chance of a hike. But where our view differs – certainly from market pricing at least – is that we expect the September Monetary Policy Statement to continue to push the message that the OCR will need to move higher as the economy recovers.
As the RBNZ noted in its July statement, the tone of the recent data warrants a more moderate pace and extent of tightening than was projected in June.
By our estimates, that could see the OCR peaking in mid-2012 around the 5.00- 5.25% range, compared to a 5.75-6.00% range previously. But from a starting point of 3.00%, that still doesn’t leave a lot of room for the RBNZ to drag its feet.
As a result, this represents a change to the expected timing of hikes, not a downgrade to our overall interest rate projections. We had already acknowledged that a pause in the tightening cycle was likely at some point in the next few months – previously we had it pencilled in for December. But with the RBNZ facing a highly uncertain global environment, mixed signals on the domestic economy, and now the biggest financial sector failure in nearly two decades, bringing the pause forward to September is a low-risk option.
