RBNZ: OCR was cut but not enough to satisfy the market - ANZ

Research Team at ANZ, notes that the RBNZ’s OCR was cut but it was not enough to satisfy the market, with the NZD up and rates selling off.

Key Quotes

“Expectations were growing prior that we could see something substantial, but what we got was an entirely balanced and appropriate response in our view. The bill track hints at 1 to 2 more cuts, although alternative scenarios show the risk is for more.

The RBNZ’s policy assessment was similar to its special Economic Update just three weeks ago, which is unsurprising. But the changes that were made were of the dovish ilk. The RBNZ noted the further falls in global yields and weak global inflation pressures (which are placing upwards pressure on the NZD). It was also more explicit that strong net migration is suppressing domestic wage pressures.

Prospects for domestic growth look good though, in a balanced economic assessment. Housing is a financial stability concern. The strong NZD is making “it difficult for the Bank to meet its inflation objective.”

On most levels we agree with the spirit of the RBNZ’s economic assessment. Strong, above-trend growth is eating into capacity, the NZD is likely to remain high, and housing is problematic – although macroprudential measures “should” assist. Importantly, the RBNZ is assuming that global conditions improve (alleviating pressures on the NZD) and inflation expectations also gradually lift. We are sceptical. It seems inevitable the OCR will head lower still, though not necessarily immediately. We now expect a cut in November and another in early 2017.

Stepping back, we still assess this action with a degree of trepidation. The NZD is strong for reasons other than just yield, and inflation is low for more reasons than just the strong NZD. Technology-based deflationary headwinds are growing. We’re not convinced more easing is going to alter that. But we also appreciate the RBNZ’s predicament and the challenge presented by the actions of other central banks forcing global yields lower. The RBNZ cannot swim against this tide. More cuts to come.

Attention now will turn to how much of the 25bp cut is passed on. It won’t be the full amount. That will likely remain the case with each progressive nudge lower in the OCR. Moreover, retail deposit rates cannot keep falling either. All else equal this means the OCR can move lower to tackle the high NZD and offset tradable deflationary forces without being overly concerned about any side effects on housing.

Against a backdrop of a market toying with the (albeit remote) possibility of a 50bp OCR cut, and market expectations more consistent with two, rather than one, more cut from here, today’s action and revised projections were not as dovish as the market expected. Consequently, we are not surprised that the NZD and interest rates have popped higher. As such, we view the spike higher in short rates as an opportunity to add to core long positions. More easing also means a flatter curve and narrower geographic spreads.”