By Roger J Kerr
It is always important to understand the difference between what you think the RBNZ should do with monetary policy and interest rate settings and what they are actually likely to do.
The current exchange rate level of 78.0 on the TWI, inflation destined to stay below the 1% minimum limit and our largest industry in financial strife all strongly point to another 0.25% OCR cut on 11 August.
However, the money markets are today only pricing in a 35% probability of a rate cut following the speech by Deputy Governor Grant Spencer last Thursday wherein he confirmed that the RBNZ are clearly in no hurry to slow the housing market.
A more definitive intention to move sooner rather than later on increasing LVR lending limits on the banks would have paved the way for an OCR cut next month.
The overly conservative tone of that speech does not give one hope that the RBNZ are ready and prepared to act on either front.
However, the stinging criticisms aimed at the RBNZ (even from the Finance Minister and PM) for their lack of urgency on the macro-prudential LVR changes will be causing a hasty review of the RBNZ’s current stance I would have thought.
We see the following upcoming announcements as important factors in swaying the RBNZ to a 0.25% OCR cut (or not) on 11 August:-
- CPI inflation numbers for the June quarter released on Monday 18 July – A weaker figure than the +0.60% for the quarter that the RBNZ are forecasting will see the OCR cut probability lift.
- Upcoming Global Dairy Trade auctions on 19 July and 2 August – Weaker wholemilk powder prices will be further deterioration in the economy’s fundamentals and lower GDP growth forecasts.
- The Reserve Bank’s own Survey of Inflation Expectations due for release on 2 August – A flat or lower inflation outlook will also increase the probability of an OCR cut.
If all of the above figures come out stronger than expected, the greater likelihood is that the RBNZ will not cut the OCR on 11 August and the exchange rate will move even higher still.
It appears that we are back into a situation of the RBNZ not trusting that their own macro-prudential tools to tighten bank lending criteria will actually work, and therefore not being prepared to reduce interest rates further as a result.
In the meantime they are sending the exchange rate higher, damaging the export sector and still not achieving the 1% to 3% target band for inflation.
The potential downgrade of Australasian bank credit ratings will be increasing bank credit margins on their own debt raising activities.
Even if the RBNZ did cut the OCR on 11 August there is an increasing probability that the full reduction will not be passed through to banking lending interest rates as their marginal cost of funds increases with the wider credit spreads.
Roger J Kerr contracts to PwC in the treasury advisory area. 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