RBNZ Preview: No OCR cut seen this week; rates to fall below 2.5% in 2016

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 25, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - New Zealand's central bank cut its benchmark interest rate (ORR) by 25 basis points back to the record low of 2.50 per cent and had been pretty confident of achieving its inflation target of 2 per cent without any further monetary easing. The central bank had however stressed that it will “reduce rates if circumstances warrant”. The Reserve Bank of New Zealand will meet this week to take interest rate related decision. The RBNZ had highlighted the need for the monetary policy to remain accommodative “to help ensure that future average inflation settles near the middle of the target range”. It must be noted here that the central bank last month charted its policy believing that inflation would rise above 1% in March. Much has changed since then and it remains to be seen how the central bank chooses to rise to the changing scenario.

    The current situation “warrants” a rate cut

    The Westpac has been predicting a cut in OCR below 2.5 per cent in 2016 for some time now. The inflation data released last week now strengthens the prediction. The Statistics New Zealand on 20th January reported the sharpest drop in the Consumers Price Index (CPI) in 17 years. CPI fell 0.5 per cent in the December quarter, marking the largest quarterly drop since December 2008.

    Inflation has now been way below the central bank's 1-3 per cent inflation target zone for more than a year now. The RBNZ had in its December’s Monetary Policy Statement forecast 0.4 inflation rate for 2015. The rising deflationary pressure steps up pressure on the central bank to slash rates further to support the economy. Fall in oil prices caused petrol prices to drop more than 8 per cent last year and that. Petrol prices weighed on prices as it fell 8.1 per cent. Slump in oil prices will keep continue to keep check on prices longer, thereby causing inflation expectations to remain low for a longer duration. Inflation is likely to remain below 1% until 2017. It can also be expected to drop below zero during 2016.

    The other factor plaguing policy makers is the weak prices for many tradable goods other than petrol. Contrary to the central bank’s argument that the lower exchange rate will push prices for tradable goods higher causing inflation to rise above 1% by March 2016, prices of tradable goods remained significantly low.

    GlobalDairyTrade auction held last week saw a small decline in prices. Westpac revised its forecast of the current season’s farmgate milk price to $4.20 which is close to Fonterra’s forecast of $4.60. The drop in global dairy prices will come as a huge disappointment to New Zealand’s farmers.

    Last week’s Real Estate Institute data on the other hand confirmed a slowdown in Auckland’s housing sector. The housing market is believed to be slowing down in Auckland. In seasonally adjusted terms house sales dropped 20 per cent from the peak while the House Price Index is down almost 6%. House prices across New Zealand have remained lower than RBNZ’s expectations. The RBNZ in December had forecast 17% house price inflation for the year to June 2016. The latest data however indicates that the housing market will likely grow below 10%. This takes the burden off RBNZ and it can now consider slashing rates without having to worry about the lower rates spiking prices in housing market.

    Some economic indicators however indicated good momentum of growth of NZ. The Quarterly Survey of Business Opinion showed a marked improvement in business confidence in December 2015. It moved up from -10% to +13% last month. The fast deteriorating global financial and economic conditions cannot be discounted.

    OCR will fall below 2.5% this year

    The conditions discussed above establish the possibility of the OCR falling below 2.5% this year. Westpac however has said that there remains some uncertainty with respect to the timing of the rate cut. Before the release of the CPI data last week it was being predicted that the RBNZ will slash rates in June or August. The dismal inflation figures have now the raised the possibility of a rate cut as early as in March. However, there will be no rate cut tomorrow and that the market is sure of.

    Post the December meeting some economists had held the opinion that the central bank’s expectation of meeting inflation target by 2016 might not materialize, creating room for more cuts. ASB Bank Senior Economist Jane Turner had observed "Our view is the circumstances will warrant further OCR cuts in June and August next year to 2 per cent. We are firmly of the view inflation pressures will not prove to be as strong as the RBNZ currently estimates.”
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