Not so fast

Developments over the past week or two have served to increase the odds of OCR cuts later this year – odds that we already felt were approaching fifty-fifty. However, we remain firmly of the view that the RBNZ will leave the OCR on hold this week. It is possible that the Monetary Policy Statement will give an explicit signal of future cuts. But more likely, the RBNZ will stick to the conditional easing bias it articulated in April.

There are three reasons we consider a cut at this week’s MPS unlikely:

• In April the RBNZ set out two clear conditions for OCR cuts– wage and price setting behaviour would have to settle below the inflation target, and domestic demand would have to cool. Those conditions have not been met. Indicators of current domestic demand have remained very firm (especially the housing market), and inflation expectations have not fallen as much as expected.

• Changing the OCR now would be out of keeping with normal RBNZ behaviour. Every series of OCR changes since 2005 (except the emergency cut following the 2011 earthquake) has been preceded by a blunt signal consisting of a sloping 90-day interest rate forecast and a comment in a press release along the lines of “…we are likely to..” or “…we expect to..” reduce/increase the OCR. No such signal has been given on this occasion.

• By our reckoning, the inflation outlook has not changed dramatically since April, when the RBNZ first articulated its conditional easing bias. Downside data developments have been largely offset by the falling exchange rate.