Westpac Institutional Bank Team
Westpac Institutional Bank
Last week Reserve Bank Governor Graeme Wheeler delivered a speech titled “Some Thoughts on the Inflation Outlook and Monetary Policy”. The speech elaborated on the messages of the July OCR review statement – chief among these being that the RBNZ is relatively cautious about reducing the OCR.
The Governor had a pointed message for markets: “Some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession.” This suggested two things: (1) the RBNZ is not inclined to move in increments of more than 25bps, and (2) while the RBNZ seems prepared to cut the OCR again in September, it is on the fence about whether any further reduction in interest rates will be required this year.
At present, market pricing roughly accords with the RBNZ’s views.
Our own assessment differs markedly from the Reserve Bank’s (and therefore we disagree with current market pricing). We remain very comfortable forecasting a low point in the OCR of 2.0%. It is worthwhile exploring where these differences in our forecast come from.
The Reserve Bank appears to be reasonably positive on the domestic economy. The plunge in world dairy prices is clearly a concern, but overall the RBNZ sees growth running just a little below trend, supported by easier financial conditions, high net migration, growth in construction and strength in the services sector.
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