Thursday, March 10, 2016

RBNZ takes path of least regret

While the case for further stimulus has been building, we didn’t think the RBNZ would cut again – at least not yet.  The Bank today took the path of least resistance, and probably least regret, and cut the Official Cash Rate (OCR) to a new record low of 2.25%.  

The RBNZ lays out the key reasons behind the cut being the deterioration in the global growth outlook, the difficult challenges facing the dairy sector, the strength in the trade weighted exchange rate, and the recent deterioration in inflation expectations.

The surprise is more about timing.  Today’s cut comes only a few weeks after the RBNZ Governor poured cold water on imminent interest rate reductions by cautioning against too great a focus on the low level of headline inflation.   Today’s surprise has seen a significant reaction in both interest and exchange rate markets.

Furthermore, while there are compelling reasons for the RBNZ to act there are also reasons to be cautious including whether further cuts to the OCR would make any meaningful difference to the domestic inflation outlook given the global nature of the disinflationary forces currently at play.  Also further interest rate cuts risk inflaming an already overheated Auckland housing market.

The key guidance paragraph is as follows:

“Headline inflation is expected to move higher over 2016, but take longer to reach the target range.  Monetary policy will continue to be accommodative.  Further policy easing may be required to ensure that future average inflation settles near the middle of the target range.  We will continue to watch closely the emerging flow of economic data.”

We did think that if they cut again they would do more than one.  The interest rate projections signal one further cut which could come as early as April or the next Monetary Policy Statement in June.