Where to now after cash rate held?

by Maya Breen06 Nov 2015

Ecoomists are of a mixed opinion whether the cash rate will again be held at December's meeting, as employment levels dropped and dairy prices were hit again this week. 

Statistics New Zealand on Wednesday showed that unemployment rose to an 18-month high of 6% in the September quarter and d
airy prices took another hit in the GlobalDairyTrade auction, following a 3.1% fall at the last event. 

ASB Bank senior economist Chris Tennent-Brown told NZ Adviser there is a good case for a lower official cash rate cut in December, as they thought there was for October. 

“The RBNZ is really banking on the currency delivering some tradeable inflation to the mix over the next year so they need a significantly weaker currency, but the currency is doing the opposite – it’s been strengthening," says Tennent-Brown. 

He says the data of the labour market is 'notoriously volatile' and the employment drop was unexpected but he expects the numbers to bounce back in the next quarter. 

"But the picture is still there that says no wage inflation coming out of the labour market. Even if this week’s number was a bit of a rogue number and we get a bounce back next quarter, you’ve still got a mix – wage inflation is running at less than 2%.

"Inflationary pressures look like they're coming from the labour market and likewise the dollar is doing the opposite of what the RBNZ needs it to do if they want that to be the source of inflationary pressures in the economy. The case is there for a rate cut in our view.”

He says he doesn't see the NZ dollar weakening too much and if the official cash rate is maintained there will be a substantial interest rate gap by the end of the year, even if the Federal Reserve hikes once.

ANZ Bank chief economist Cameron Bagrie told NZ Adviser he is not yet convinced the Reserve Bank will make a cut in December. 

“The longer term rates are going to be biased up, given what we’ve seen globally out of the United States. I think they still have another cut up their sleeve at least, so I’m not convinced short-term borrowing rates have yet troughed."

“If you look at the general cash flow pressures of the dairy sector, they are going to remain pretty intense until 2017 - so that is a very severe economic headwind for other parts of the economy to patch up.”      

The New Zealand dollar fell to a month low as the US dollar strengthened and dairy prices weakened, with the kiwi touching 65.68 US cents, trading at 65.72 cents at 8am in Wellington, from 66.58 cents at 5pm on Wednesday, according to the NZ Herald. 

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