The RBNZ cut the Official Cash Rate a further 0.25% this morning, taking it back to the historical low of 2.5%.
Projections for the 90-day bill rate suggest we are now at the bottom of the interest rate cycle and that there may be some reluctance to cut interest rates further. However the RBNZ retained a mild easing bias in the news release stating that while they expect to achieve their inflation target with current interest rate settings “…the Bank will reduce rates if circumstances warrant.”
To emphasise the uncertain outlook the Bank discusses four alternative scenarios including some that could lead to stronger growth and higher inflation along with others that could lead to lower growth and inflationary pressure.
The trajectory of the Bank’s (central case) growth forecasts are the same as ours in that after a weak patch in the first half of this year growth is expected to improve from the second half of this year, however the Bank’s forecasts are higher than ours. They see GDP growth of 2.9% in the year to March 2017 (AMP Capital 2.5%) followed by 3.4% in March 2018 (2.8%).
The Bank expects inflation to rise but notes this is largely due to prior falls in petrol prices dropping out of the annual calculation and the flow through of the lower exchange rate into retail prices, the quantum of which remains highly uncertain given the level of competitiveness and lack of pricing power in the retail sector. They expect inflation to be at the midpoint of their 1-3% target band by late 2017.
Given our expectation that growth will be lower than the RBNZ is currently forecasting, we concur with the sentiment in the Bank’s news release that interest rates may need to be lowered further from here. It's certainly the case that if the RBNZ is going to do anything further soon, its more likely to be lower than higher interest rates. The tenor of the data flow from here will be critical. Watch this space.