Why the cash rate will hold tomorrow: ASB and ANZ

by Maya Breen28 Oct 2015
The Reserve Bank of New Zealand is set to review the official cash rate tomorrow morning, following three consecutive 0.25% cuts which brought the cash rate to its current standing at 2.75%.

ANZ Bank chief economist Cameron Bagrie told NZ Adviser he expects the cash rate to be left alone tomorrow.  

“I think the Reserve Bank’s going to be having a bit of a tea break after cutting three times. Ultimately the cash rate is going to end up a bit lower but it’s time for a little bit of pause and reflection.”

Bagrie agrees that it is time for a pause in cash rate cuts and says one of the major drivers behind the previous three cuts were low dairy prices which have now rebounded, remaining low but removing a big source of downside risk. He said other factors playing a part in the Reserve Bank holding further cuts tomorrow are a pickup in partial indicators including an increase in confidence and the housing market picking up beyond Auckland.

“But the bigger picture here is I still think dominated by inflation, and the Reserve Bank has still got very low inflation so I think ultimately they are going to end up doing a little bit more, it’s just a question of when.”

ANZ’s Bagrie says their central scenario is for the cash rate to drop to 2.5% in March but this is dependent on the global scene and the NZ dollar.
“That is a scenario that’s based on the global scene remaining stable and the NZ dollar not growing more wings,” Bagrie says.

ASB Bank Chief economist Nick Tuffley said to NZ Adviser he also expects the Reserve Bank will hold rate but thinks there is plenty of scope for further rate cuts.
“It’s the housing market which will be the one that makes the Reserve Bank nervous, because interest rates are very low, the Auckland housing market is constrained by supply and migration inflows are strong – and that’s a headache for dropping rates.”

He says another challenge for the Reserve Bank is the strong rise in the New Zealand dollar and an environment where other central banks will look to prolong its recent strength.

They (Reserve Bank) are really banking on the exchange rate falling further and pushing inflation up - they don’t actually have much in their inflation outlook beyond a rebound in the exchange rate to push and hold up inflation.

“We’re facing the risks of the Federal Reserve leaving rates on hold for longer rather than pushing them up, we’ve got the European Central Bank probably doing more quantitative easing, you have the People’s Bank of China cutting rates and you have the Bank of Japan potentially considering more stimulus over the next few months.”
Both economists say there is a chance the cash rate could drop to below 2.5% in the next year.

Bagrie will be inclined to call the official cash rate below 2.5% if the NZ dollar goes a lot higher and the global scene looks worse but points out this is not their central scenario at the moment.

Tuffley says they expect to see one more 0.25% cut to bring the cash rate down to 2.5% but place a 20% risk on the cash rate dropping below 2.5% in 2016.

BNZ's head of research Stephen Toplis told the media that current global conditions could render lowering interest rates to boost inflation fruitless and Westpac stands by their expectation that the OCR will reach 2% in 2016.

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