Interest Rate Cut Almost Certain from the RBNZ

Key Points:

Low inflation environment should pressure the RBNZ to cut the OCR.

Cooling off of the Auckland housing market gives the Bank some room to move.

Keep an eye on the RBA Cash Rate decision in the lead up to the OCR announcement.

As we move closer to the end of 2016, time is rapidly running out for the various promises made by reserve banks around the world to materialise. In New Zealand’s case, the RBNZ’s decision on the OCR is due out 9th November and Graeme Wheeler’s intimations that further cuts are required going forward certainly seem to hint that rates could be lowered. However, as usual, speculation over whether or not we will see a drop in the OCR is beginning to surface so it might be time to look at the current economic landscape in New Zealand.

First and foremost, inflation remains a key driver of the RBNZ’s decisions on interest rates and the latest data certainly seems to suggest that inflation is by no means ready to surge.  Specifically, last month’s CPI data showed only a 0.2% uptick and, whilst this was better than the forecasted 0% figure, it will undoubtedly be encouraging Wheeler to support another cut in the OCR. In fact, in his September remarks, the Governor basically spelled out that he expects weaker CPI number this quarter which will require a rate cut to combat.

Also impacting the RBNZ’s decision on interest rates is, of course, the white hot property market in the nation’s largest city.  In past OCR announcements, the fear of exacerbating this housing affordability crisis has often been cited as a reason to hold off near-term cuts. However, these fears may be somewhat more subdued this November given that Auckland’s average house price dropped by around 2.1% between August and October. Whilst the drop is by no means signalling that the crisis is nearing an end, it will at least provide the reserve bank with a little room to manoeuvre.

However, despite Wheeler’s assurances that a depreciation of the NZD is required, there is some evidence that we may have to wait until 2017 to see any easing of NZ rates. Primarily, firming global dairy prices have been seen over the past few months with the latest GDT Price Index increasing by 1.4%.  As a result, New Zealand’s primary export industry may not be in as dire straits as it was around the time of previous cuts to the OCR.

Aside from these fundamentals, the imminent RBA Cash Rate decision will play a large role in influencing the RBNZ’s decision on its own rates. Specifically, if their Australian counterparts elect to lower interest rates, the RBNZ will be all but certain to follow suit to keep NZ dairy competitive in its largest export market. Currently, the Australians are forecasted to hold steady at the 1.50% mark but keep an eye on the RBA announcement as they could surprise the market with an unexpected outcome.

Ultimately, the balance of evidence seems to be indicative of a near-term cut to the OCR which, knowing Wheeler’s reluctance to cut by 50bps, will see the rate shift to 1.75%. However, keep an eye on the wider macroeconomic environment as any major upsets could see the RBNZ hold steady once again.