It believes that the central bank would risk little to nothing in cutting again
Kiwibank economists are urging the Reserve Bank of New Zealand (RBNZ) to stop fighting the inevitable – slashing the official cash rate (OCR).
They predicted that RBNZ would just cut the OCR to 0.75% in February if it refused to cut it this month, so there’s no point in waiting. They also believed that the central bank would risk little to nothing in cutting the OCR again but it will risk undoing some of its earlier work if it did not push through.
“We don't believe it's time for the RBNZ to sit on its hands,” the economists wrote on their report. “This week, the RBNZ has the opportunity to 'surprise' markets, again, with a 25bp (not 50bp) cut to an RBA-equalling 0.75%.”
“The element of surprise is important. Sentiment in financial markets (or risk appetite) has improved markedly. Global equity markets have been buoyed by mentions of a trade deal (phase I) between the US and China, a postponement of Brexit (and election), and continued central bank support. Thoughts of recession have receded, but remain. The sharp improvement in sentiment largely reflects re-positioning, and the amount of pessimism previously priced.”
Read more: Economists divided over RBNZ's upcoming OCR review
The economists warned about higher lending rates if the RBNZ would not slash the OCR this month.
“We expect the RBNZ's OCR track to drop to ~0.65-to-0.7%. If the RB cut, as expected, the bank's staff should give us a probability of another cut, if things deteriorate, to 0.5%,” they said. “An OCR track falling to 0.65-to-0.7% (or close to), will give us a 20-to-40% chance of another cut to 0.5%. That's important. We believe the RBNZ has an opportunity to keep the pedal to the metal, given the balance of risks offshore and at home.”
They further explained that cutting the OCR to 0.75% is the “path of least resistance and least regret” as it could help in preventing the rise of lending rates.
“A cut on Wednesday must be followed up with a 'chance' of another cut down the road. In doing so, markets will need to price a terminal rate around 0.6%. Such an outcome will keep lending rates under downward pressure. And the currency will glide lower also,” the economists concluded.
