Thursday, July 23, 2015

RBNZ reduces the OCR to 3.0%, further cuts likely

As was widely expected the RBNZ cut the Official Cash Rate 25 basis points to 3.0% this morning, its second consecutive cut.  In a well-balanced statement, the RBNZ signaled that some further easing was likely.

The RBNZ acknowledged the recent softening in the economic outlook.   At this point that seems consistent with our view of growth dropping down to a 2.5% pace rather than the earlier expectation of 3.0%.  It’s important to note however that they won’t do a full forecasting round until the lead-up to the September Monetary Policy Statement.

On inflation they expect the CPI to be close to the midpoint of the target band by early 2016 – again consistent with our own forecasts.  We have headline CPI inflation at 1.9% in the year to June 2016.  Much depends though on the speed of the pass-through of the recent decline in the exchange rate into the CPI which will be dependent on the strength of underlying demand, competitive pricing pressures, margins and profitability.

On the exchange rate they acknowledged the significant decline since April and the contribution this has made to the recent easing in monetary conditions.  The RBNZ has dropped the recently oft-used line about the level of the exchange rate being unjustified and unsustainable, although they state that further depreciation is necessary given the weakness in export commodity prices.

All things considered this was a well-balanced statement acknowledging the recent deterioration in the growth outlook and the appropriate need for easier monetary conditions.  We expect the RBNZ will lower the OCR further with 25bp cuts in September and October, but the need for more aggressive action is reduced by the recent meaningful adjustment in the exchange rate.