Close call

The outlook for monetary policy is delicately poised. Following the Reserve Bank's change of tone in its March OCR review, we shifted our call to a rate cut as early as the May Monetary Policy Statement, but we emphasised that this was subject to upcoming data. We expect this week's inflation report to be subdued, but we're sensitive to any surprises. Meanwhile, a trio of soft activity indicators will have added to the RBNZ's concerns about whether the local economy has the momentum needed to generate a lift in inflation.

The RBNZ Governor's comments in a media interview last week were in line with our initial read of the March OCR review. Governor Orr noted that the March statement was meant to reflect that the balance of risks has shifted to the downside. But he emphasised that the decision in May is by no means settled.

On balance, we still think that the odds are in favour of a rate cut in May. The RBNZ has highlighted concerns about the slowing global economy in particular – a point that was underscored last week when the IMF further downgraded its world growth forecasts. We're more optimistic on global growth than the market appears to be, but we don't think that gloomy sentiment will dissipate within the space of a few weeks.

In terms of local developments, the March quarter CPI release on Wednesday presents the most immediate risk to our view. We're expecting a subdued 0.2% increase for the quarter, which would take annual inflation down from 1.9% to 1.6%. The expected slowdown is entirely due to fuel prices. Petrol prices fell sharply at the end of 2018, and though they've started to tick up again in recent weeks, the average price over the quarter was down by more than 6%.

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