Roger J Kerr outlines why the RBNZ Governor needs to 'watch and wait' a while longer

By Roger J Kerr

In Australia last week 13 out of 14 economists who were polled predicted a 0.25% OCR interest rate cut by the Reserve Bank of Australia (“RBA”) on Melbourne Cup day.

Prior to the 3 November RBA review the moneymarkets in Australia were sitting on the fence with a 50/50 chance of a 0.25% cut.

The previous RBA meeting minutes indicated strongly that they were in “neutral” policy mode and the probability of an OCR cut on 3 November was actually quite low. The RBA did not change their OCR, commenting that the AUD currency value had fallen a long way and parts of the economy were actually going along pretty well.

Result: RBA 1 – Aussie Economists 0.

Here in New Zealand, a Reuters survey out this morning also has 13 out of 14 economists predicting a Reserve Bank of New Zealand (“RBNZ”) 0.25% cut to the OCR on the 10 December monetary policy statement.

ANZ have changed their view and they are now the single dissenting voice as they no longer expect a December OCR cut. The local NZ moneymarkets in pricing future interest rate levels are only pricing a 50% probability of a 0.25% decrease in December, however they are pricing a full 0.25% cut by March.

Given the almost identical circumstances between Australia and New Zealand as described above, the RBA decided last week to leave their OCR unchanged.

What would you do on 10 December if you were standing in RBNZ Governor Graeme Wheeler’s shoes?

My view is that the Governor needs to watch and wait a little longer to see what pans out in the economy between now and March. There are some very good reasons as to why the RBNZ will be in a much better position by March/April to ascertain whether further monetary loosening is warranted, or not:-

  • The severity of the forecast El Nino summer drought on our agricultural production will be more evident by March. If the drought is a bad one and spreads into the Waikato province then the outlook for GDP growth and the economy in 2016 deteriorates and would support further interest rate reductions.
  • The RBNZ and Government will be in a more informed position by March as to the impact of recent tax and regulatory changes on the residential property market. Additional macro-prudential policy adjustments may be necessary if the +25% property price boom in Auckland continues at the same pace through the summer. Why would the RBNZ fuel that boom even more by reducing interest rates in December?
  • By mid-April the RBNZ will have the December and March quarter’s CPI inflation results to judge whether prices have actually increased in line with current RBNZ forecasts of the annual inflation rate shooting up from 0.4% to 2.00%.
  • Governor Wheeler follows the US economy and monetary policy developments very closely. He will want to wait and see that the Federal Reserve do actually increase their official interest rates on 17 December, in which case the resulting stronger USD currency keeps the NZ dollar at lower levels. Under this scenario Governor Wheeler will feel less inclined to cut interest rates to depreciate the NZ dollar on 10 December  as the Fed does that work for him a week later on 17 December.

Result after 10 December: RBNZ 1 – Kiwi Economists 0.


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Daily swap rates

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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com