The unchanged OCR rate was no surprise, however economists say another cut is imminent
ASB economists continue to predict a further OCR cut to 1.25% in August following the Reserve Bank’s latest OCR statement, saying the unchanged 1.5% rate was a ‘balanced decision that firmly points to an imminent rate cut.’
Senior economist Mark Smith says the discussion held by the Reserve Bank was broadly in line with expectations, with a 25bp rate cut close to being fully priced for August. The question now is whether this will be the ‘floor’, and Smith says any negative shift in the global environment and heightened trade tensions market may yield a further OCR cut later down the line.
“The other [factor] would be if the RBNZ materially reassesses its view of how much slack is in the labour market and concludes there is a lot more than thought – which is the big change in view driving the Reserve Bank of Australia to cut interest rates decisively,” Smith added.
“For now, the RBNZ still assesses that employment is “broadly at its maximum sustainable level”, implying no view change to date. But watch this space.”
The Reserve Bank also expressed concern over ‘soft’ house prices and weak business confidence, and its impact on domestic spending. Smith says he is ‘sceptical’ as to whether this will improve, though this also seems primarily directed towards the Auckland housing market, as regions outside of Auckland and Queenstown continue to grow at a steady place.
“We remain sceptical that conditions are in place to trigger a pick-up in growth momentum,” Smith said. “Still-sluggish business sentiment continues to point to sub-trend growth continuing.
“Furthermore, we expect that solid population growth, still-present dwelling shortages and very low mortgage interest rates to trigger a pick-up in house price inflation by the end of the year.”
The market reaction was subdued given the statement was largely in line with expectations, and the NZD lifted by approximately 20 points.
