“All hell will break loose” if the Reserve Bank leaves the Official Cash Rate unchanged at 2.75% on Thursday, according to Commonwealth Bank of Australia strategists.
CBA is the parent of ASB, which recently changed its pick for the path of interest rates and now believes the OCR will fall as low as 2% next year.
CBA senior interest rate strategist Jarrod Kerr and senior currency and rates strategist Peter Dragicevich said in a strategy note that the “central scenario” of a 2.5% OCR has been signalled by the RBNZ.
“And we believe the central scenario will be delivered this Thursday. In every decision there are pros and cons, risks and rewards. The risks of remaining on hold outweigh any rewards. The Antipodean transition from goods exports, to service exports requires a weaker currency. The drop in New Zealand’s terms of trade requires a softer currency to alleviate the blow to domestic incomes. A weaker currency also stimulates key exports in tourism, education and other manufactures (and the same can be said for Australia),” the strategists said.
“Should the RBNZ decide to hold the cash rate above their central scenario at 2.75% Thursday, then all hell will break loose.
“The currency would spike at least 1‑2 cents higher, and the [wholesale swap] rates market would be unforgiving in a 15 to 25bps move higher,” they said.
Kerr and Dragicevich said the strength of the NZ dollar against major trading partners on the trade weighted index was deflationary, and currently 7‑to‑10% above the RBNZ’s forecast track.
“Most of the RBNZ’s forecast return to 2% inflation is based on a bounce in tradables inflation. We believe the strength of the currency has significantly reduced the likely bounce in tradables inflation.
“It is time for the RBNZ to use its main policy tool. The path of least resistance is a rate cut to the telegraphed 2.5%. The rates market would move ~10‑15bps lower in a controlled (front‑loaded) move, and the currency could lose as much a cent. Job done…”
But meanwhile, ANZ economists continue with their outlying view (among economists – though not in terms of market pricing) that there won’t be and shouldn’t be a change in rates this week.
In their latest weekly Market Focus the ANZ economists said an improving domestic growth backdrop was a key reason they would be holding fire this week.
“Certainly a cut is possible, given the low inflation environment, El Nino risks and stubbornly high NZD. But cutting the OCR in order to get the NZD down when the economy is in fact firming is spitting in the wind – upwind,” they said.
“If the economy is weakening you at least have a chance, as you are spitting with the prevailing economic breeze. Changes in monetary policy can have very transitory – if not outright contrary – impacts on the currency. Task one was to get growth back on track; the RBNZ can tick that box. Task two is for that to flow into inflation. That’s the current uncertainty. Inflation is being buffeted by structural and cyclical forces that have diluted the reliability of traditional real economy / inflation linkages. We’d wait for more clarity and be guided more by inflation outcomes from this point.
“RBA Governor [Glenn] Stevens summed it up pretty well when he recently told markets to ‘chill out’ and wait and see how things unfold after Christmas. Central banks like to be proactive, but it sometimes pays to abide by the old ‘when in doubt, do nowt’ view as well.”