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16 Jul 2015
RBNZ to stay ultra dovish, 1.25bp of cuts by year-end - Westpac
FXStreet (Bali) - Dominick Stephens, Chief Economist at Westpac Economics Team, notes that the RBNZ will need to cut interest rates even further as plunging dairy prices weigh on the economy, now expecting the OCR to fall to 2.0% by the end of this year (previously 2.5%).
Key Quotes
"We now expect the RBNZ to reduce the OCR to 2.0% by the end of this year. This will involve one reduction of 50bp - most likely in September, but possibly as early as next week's July OCR Review. At the other three meetings, we would expect 25bp reductions in the OCR.
At today's GlobalDairyTrade auction, dairy prices fell 10.7%. We revised our forecast of Fonterra's milk payment to farmers to $4.30 /kg, which is lower than last season's $4.40."
A few hours later inflation figures were, once again, softer than expected. And tomorrow we will publish a bulletin arguing that the Canterbury rebuild has peaked nine months earlier than previously expected. This means that the rebuild will not add materially to economic growth over the remainder of 2015 or in 2016 (and will detract materially from growth starting in 2017)."
"These are all very material developments, and they suggest that the RBNZ has a great deal of extra work to do in order to return inflation to 2% on a sustained basis. Our forecast for each OCR Review is as follows: July: -25bp, September: -50bp, October: -25bp, December: -25bp. We acknowledge a risk that the 50bp reduction could come as early as July. However, at this stage we feel it is more likely that the RBNZ will cut 25bp in July, and 50bp in September."
"The strong state of the housing market may be the factor that prevents a 50bp reduction in July. By contrast, we would expect the faltering economy to have dented the housing market by September. In addition, July is only a one-page OCR Review whereas September is a full Monetary Policy Statement - the RBNZ may prefer to wait for a full communication opportunity before taking bold action."
Key Quotes
"We now expect the RBNZ to reduce the OCR to 2.0% by the end of this year. This will involve one reduction of 50bp - most likely in September, but possibly as early as next week's July OCR Review. At the other three meetings, we would expect 25bp reductions in the OCR.
At today's GlobalDairyTrade auction, dairy prices fell 10.7%. We revised our forecast of Fonterra's milk payment to farmers to $4.30 /kg, which is lower than last season's $4.40."
A few hours later inflation figures were, once again, softer than expected. And tomorrow we will publish a bulletin arguing that the Canterbury rebuild has peaked nine months earlier than previously expected. This means that the rebuild will not add materially to economic growth over the remainder of 2015 or in 2016 (and will detract materially from growth starting in 2017)."
"These are all very material developments, and they suggest that the RBNZ has a great deal of extra work to do in order to return inflation to 2% on a sustained basis. Our forecast for each OCR Review is as follows: July: -25bp, September: -50bp, October: -25bp, December: -25bp. We acknowledge a risk that the 50bp reduction could come as early as July. However, at this stage we feel it is more likely that the RBNZ will cut 25bp in July, and 50bp in September."
"The strong state of the housing market may be the factor that prevents a 50bp reduction in July. By contrast, we would expect the faltering economy to have dented the housing market by September. In addition, July is only a one-page OCR Review whereas September is a full Monetary Policy Statement - the RBNZ may prefer to wait for a full communication opportunity before taking bold action."