Not all convinced on cash rate cut tomorrow

by Maya Breen09 Dec 2015
In October’s meeting, the Reserve Bank kept the cash rate on hold but indicated another cut was likely to ensure inflation hit close to the middle of the target range. 

According to a Bloomberg survey, 15 of 18 economists expect Governor Wheeler will lower the official cash rate by 25 basis points to 2.5 percent tomorrow.

But ANZ chief economist Cameron Bagrie told NZ Adviser he still stands by what he said in October, that it is unlikely the Reserve Bank will make a cut in December.  

“If I was the Reserve Bank, I’d be holding fire,” says Bagrie. “I’d be a little bit more patient but it’s one of those calls where it can go either way. The economic signals are quite mixed.”

He says a major reason the cash rate should hold is because the economy is picking up but he does see the cash rate dropping in early 2016.

“I think the Reserve Bank will be cutting again, it’s just a question of timing,” says Bagrie. 

“I think we’ll see another cut in the first quarter of next year and then, dependent upon the global scene, we might see more later in the year.”  

But Westpac senior economist Michael Gordon said, although it’s far from a clear cut choice, he thinks it is likely there will be a cut tomorrow.

“The Reserve Bank starting point in their last set of forecasts was that they would have one more cut but they were ambiguous about when they might deliver that,” Gordon told NZ Adviser

“Since then there has been fairly mixed messages on the economy so I don’t think it has entirely resolved the question of when to provide further easing, but on the whole we think there is a case for them doing it this time round than delaying further.”

Although the Reserve Bank has said they expect to be within their inflation target by early 2016, Gordon said they expect it to reach the target towards the end of next year. 

“We expect the cash rate to go down to 2% next year - that is different from the rest of the pack but again it’s based on a view about inflation. 

“We’re not overly pessimistic on the economy, it’s just a question of what does it take to get inflation back to 2% if the Reserve bank are indeed serious about that.”

ASB economist Kim Mundy said that the case is strong for a cut tomorrow because the RBNZ cannot rely on US Fed rate hikes to lower the NZD any longer and must make a move to meet its inflation target . 

"To be frank, the RBNZ has been putting too much weight on a lower NZD to deliver inflation back to its target,” Mundy wrote in ASB’s Business Weekly economic report.  

“And relying on an “expected” outcome of a Federal Reserve rate hike has left the RBNZ with a lame one trick pony. The RBNZ can no longer afford to wait and watch. If it is to ensure inflation gets back to its target in the medium term, the RBNZ must take action and cut the OCR further.”

ASB expects an additional 75bp worth of cuts by August 2016.

If the cash rate does get cut tomorrow it won’t ease concerns that lower borrowing costs may fuel an already red- hot housing market and Bank of New Zealand’s head of research in Wellington Stephen Toplis doesn’t think the Reserve Bank should cut rates, although it’s likely he told Bloomberg.

“We tend to pigeonhole ourselves: there’s an inflation target and we’ve got to meet it,” said. “Surely what’s happening around the rest of the economy matters as well. Isn’t it a bit dangerous to be adding stimulus in this environment?”

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